The 401(k) savings plan has been one of the most popular employer-sponsored retirement plans available, but it isn’t available to every worker. According to the Bureau of Labor Statistics, only 67% of private industry workers had access to an employer-provided retirement plan in 2020. Many people work for small businesses or freelance and don’t have access to an employer-sponsored 401(k). Others aren’t eligible for company benefits because they work part-time.
While the 401(k) is an excellent tool to help you establish your retirement funds, you may need to use an alternative tool if one isn’t available to you. A 401(k) alternative includes regular investment accounts, traditional and Roth IRAs, and defined cash balance benefits. The other options offer a great way to save for retirement.
Importance of saving for retirement
Saving for your retirement enables you to create the future that you want with the finances you currently earn. A retirement account allows you to set aside money to do what matters most to you, so you will have the resources to pay your bills when you can no longer work. A nice retirement fund also allows you to leave a legacy or stop working earlier. Retirement funds can be used how you like to enjoy traveling, entertainment, and visiting family members.
The savings expectations for a comfortable retirement increased by ten percent in 2021 to $1.04 million. It can take quite a bit of time to save that amount, so getting started as early as possible is important, and using retirement investment tools to maximize your savings is essential.
Building your retirement fund through a dedicated retirement investment account allows you to grow your money through compound interest, dividends, and investment returns. A contribution to your retirement account may reduce the amount of taxes you owe and allow you to avoid taxes on earnings that accrue on your retirement investments.
Alternatives to a 401(k)
If you don’t have access to a 401(k) or have already made the maximum yearly contribution, you can still open one of the following types of retirement savings tools. Some of the features are even more advantageous than a traditional 401(k) and may even be more useful in your life.
Roth IRA
A Roth IRA is an individual investment account used for retirement where the deposits are taxed, so you don’t have to pay taxes on the withdrawals during retirement. You can use a Roth IRA to invest in any financial instrument whose value can be measured daily. The limit to your contribution in 2022 is $6,000. If you don’t need the money in retirement, it can continue to grow tax-free for your beneficiaries. A Roth IRA can also be used to buy or build your first home. The ability to use the funds in a variety of ways makes it a better option than a 401(k) in certain instances.
Traditional IRA
A traditional IRA allows you to defer paying taxes on the contributions until you are making withdrawals from your account. Your money will grow tax-free until you begin making deductions. You will also receive a tax deduction from your deposits on your yearly taxes. The IRS also allows for a rollover of your 401(k) to a traditional IRA. The IRA can be rolled over to the surviving spouse. Another benefit of a traditional IRA is that you have control over managing the investment unlike a 401(k).
Cash-Balance-Defined Benefit Plan
A great alternative for self-employed individuals who were successful, but too low on cash to build a retirement plan early in life. The cash-balance-defined benefit plan allows you to catch up on saving for retirement. It is a pension plan with the option of a lifetime annuity. Just like a 401(k), investments are professionally managed and participants are promised a certain retirement benefit. The benefits do not come in the form of a monthly income stream but are stated in 401(k) style account balance.
An Investment Account
You may open a regular investment account and use it to save for retirement. Almost any financial institution will allow you to open an account and contribute as much as you want. There are no limits when using a regular investment account to save for retirement. You will be taxed on capital gains as long as the investments are held for over a year. You may pay a lower rate on these investments than on ordinary income.
Whether you have maxed out your 401(k) contribution and want to save more for retirement or don’t have access to a 401(k) employer-sponsored plan, there are options to help you save for retirement. These alternatives can help you get on track and be personalized to your financial situation. They give you the flexibility to contribute a smaller amount of money and defer the taxes you owe until later. If you haven’t started planning for retirement, there is no better time than now.
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