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Alternatives to 401k: Retirement Plans Aren't Created Equal

Zoe Team

Jun 15, 2020

5 min read

A financial advisor reviewing a plan with two clients at a table

Key Takeaways

401ks aren’t one-size-fits-all; alternatives exist for different financial needs.
IRAs, SEP IRAs, and One-Participant 401ks offer flexible tax advantages.
Periodic reviews with a financial advisor help align retirement plans with goals.

Frequently Asked Questions

Are there alternatives to a 401k?

Yes, several exist, including Traditional IRAs, Roth IRAs, SEP IRAs, One-Participant 401ks, and Cash-Balance Defined-Benefit plans.

Who should consider an IRA?

IRAs are ideal for freelancers, small business owners, or employees whose companies do not offer a 401k plan.

Can I combine a 401k and an IRA?

Yes, a traditional IRA can often be combined with other retirement plans, such as a 401k, depending on your income level.

If a tradtional 401k isn’t right for you, there are many great alternatives to 401k retirement plans for you to consider when planning for your retirement.

On your journey towards retirement, and choosing the right retirement plan for you, it can often feel like all signs point towards the traditional 401k. Many employers offer 401k retirement plans due to the opportunities it offers for maximizing contributions on pre-tax compensation for employees. While it’s important to understand 401ks as they are a popular and effective retirement savings tool, the same retirement savings account isn’t necessarily right for everyone. Luckily, there are many great alternatives to 401k retirement plans for you to consider when planning for your retirement.

Understanding 401ks

One of the best-known retirement plans is the 401k: a long term savings plan where you contribute to a retirement plan through your employer. It is designed such that a portion of your salary is saved or invested before taxes (except for designated Roth deferrals). Taxes will not be paid before the money leaves the account. Additionally, employers can sponsor the amount saved. Distributions, including earnings, can be included in taxable income at retirement.

In the traditional 401k, there are limits to how much can be contributed annually. For 2020, a cap increase was legislated, reaching $19,500. Plus, those who are 50 or older can contribute an additional $ 6,500. The 401k holds several alternatives to be chosen to achieve the best revenue.

That said, 401ks aren’t the ideal retirement savings solution for everyone. Other alternatives to 401ks can guarantee better future results or adapt more appropriately to your work and financial situation.

Alternatives to 401k Plans

Traditional IRA

The Individual Retirement Account (IRA) is a great alternative for freelancers, small business owners, or people who work with employers that don’t offer a 401k. This type of account offers retirement-oriented tax advantages, such as allowing money to grow tax-free. Taxes are only paid when the money is withdrawn at retirement. Also, contributions to the account can be deducted from your taxable income, so you avoid taxes on that income when contributing.

The traditional IRA can be combined with other retirement plans, including a 401k. The money in your account will grow tax-free until retirement. Keep in mind that with an IRA, the maximum annual contribution value is $ 6,000 and $ 7,000 if you are at least 50 years old. Consult with your financial advisor, as depending on the income and the type of account chosen, contributions may not be tax-deductible.

Roth IRA

Roth IRA accounts have a structure similar to traditional IRAs, except for two key features: how they are taxed and that the Roth accounts allow tax-free withdrawals under certain stipulations. These accounts are bankrolled with dollars after taxes; therefore, the contributions that are made are not deductible. Note that the moment you start to withdraw funds (for example, to pay for college expenses) that money is tax-free. This flexibility makes Roth IRA accounts very attractive to investors.

SEP IRA

A Simplified Employee Pension IRA, or SEP, is a specific IRA for those who have their own company. It shares the basic operation with a traditional IRA. The difference is that instead of the contribution limit of $6,000 (for those under 50), it is possible to contribute up to $57,000 in 2020 or 25 percent of their income, whichever is less.

One-Participant 401k Plans

One-participant 401k plans are designed for independent entrepreneurs as they are particularly profitable for those who have additional income. This is a simplified version of the 401k: focused on companies that have no employees other than a spouse. In 2020, the maximum contribution limit was set to $7,000 divided into two components: $19,500 that is contributed as an employee and $37,500, as an employer. Those over 50 can contribute up to $26,000 as employees and $63,500 as employers.

One of the benefits of this alternative to a traditional 401k is that you can save 100 percent of your income (up from 25% the SEP-IRA allows) up to the maximum annual contribution limit. If you have additional income, you can maximize the amount of money you save annually.

Cash-Balance Defined-Benefit Plan

This alternative is ideal for people who are self-employed with a considerable income, but that did not previously manage to build a retirement plan. This defined benefit plan differs from both traditionally defined benefit plans and cash balance plans. Instead of offering the benefit payment to an employee in the form of a series of lifetime payments, they deliver the benefit in terms of an established account balance. These accounts are often called “hypothetical accounts” because they don’t reflect actual contributions to an account nor the actual earnings and losses assignable to the account.

Choosing an Alternatives to 401K Retirement Plana

There are plenty of great retirement plans available depending on your unique financial situation. While having a company-sponsored 401k plan works for some, there are situations where you should evaluate alternatives to a 401ks. IRAs are a straightforward alternative to traditional 401k plans, especially for savers who will not benefit from employer matching. For freelancers, a One-Participant 401k Plan is also a fantastic option, given its ability to protect so much income and grow tax-free.

As in any other aspect of your financial planning, a periodic review with your financial advisor will allow you to adjust percentages and define what plans can be a good alternative or a great complement to reach your retirement goal.

If a tradtional 401k isn’t right for you, there are many great alternatives to 401k retirement plans for you to consider when planning for your retirement.

Understanding 401ks

Alternatives to 401k Plans

Traditional IRA

Roth IRA

SEP IRA

One-Participant 401k Plans

Cash-Balance Defined-Benefit Plan

Choosing an Alternatives to 401K Retirement Plana

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Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.

(646) 680-9244

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666 Third Ave, 6th Floor
New York, NY, 10017

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Explore the Zoe Wealth Platform with AI

Some of this content may have been generated with the assistance of AI. Please review and sense-check all outputs, as AI tools can occasionally produce incomplete or inaccurate information.

(646) 680-9244

support@zoefin.com

666 Third Ave, 6th Floor
New York, NY, 10017

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