The most popular workplace retirement plan is the 401(k). Nearly 80% Americans have one. This gives millions of Americans the opportunity to start saving for retirement.
Unfortunately, not everyone has access to a plan under 401(k). This could be because their employer does not offer one or because they are part-time workers who do not meet the employer's requirements.
Additionally, even though most employees work for companies offering 401(k), only half of them actively contribute to the plan.
It is obvious that many people don't have access or don't take advantage of a 401k plan. This raises the obvious question: How can people save for retirement? There are other options employees have to consider for investing in retirement. Many of these vehicles can be tax-advantaged, just like a 401k.
What is a 401k Plan?
Before we get into the options for a 401k, let's first discuss how 401k plans work. This will help you understand the differences between these accounts and how you can decide which one is best for you.
Many for-profit businesses offer a 401(k), which is a workplace retirement plan. This account allows workers to contribute up to $20,000. An additional catch-up contribution can be made by workers 50 years and older, which is $6,500. Employers may also contribute to workers' accounts for a combined contribution limit of $61,000.
Most 401(k), or pre-tax, plans offer tax-deferred benefits. This means that contributions are made before taxes. You'll be subject to income taxes on the distributions you make during retirement. The money grows in the account tax-deferred. These accounts are meant for retirement savings. You must keep the money in your plan until you turn 59 1/2. Otherwise, you could be subject to a 10% penalty and additional income taxes.
10 401(k), Alternatives
Although 401(k), plans are the most popular retirement savings vehicle, there are other options. Although each vehicle offers different benefits and perks, they can all be a great way to build wealth for retirement.
1. Roth 401(k).
Although technically a Roth 401 (k) plan is a type of traditional 401(k), many people are unaware that they have it. The Roth 401 (k) is almost identical to a traditional plan, but it has a tax advantage.
A Roth 401k(k) is different from a traditional 401k, which has pre-tax deductions. It has after-tax deductions. They won't lower your taxable income for the current year. You won't have to pay tax on the money once it is in your account. You'll receive tax-free distributions in retirement and your investments will grow tax-free.
2. Traditional IRA
An individual retirement account (IRA), is a type you open through a brokerage firm and not through your employer. The IRS allows workers up to $6,000 per annum to a traditional IRA. There is also a $1,000 catch-up contribution.
To contribute to a traditional IRA you must have earned income. The amount you can contribute cannot exceed 100% of your earned income. If you earn less than $4,000 per year, your contribution limit is $4,000 and not $6,000
A traditional IRA has the same tax advantages as a traditional 401 (k). Tax-deferred investments and tax-deferred contributions will be available to you. You will then pay income taxes on the distributions. You'll also be subject to a 10% penalty for withdrawing the money before your turn of 59 1/2.
It is important to remember that not all contributions (or even a portion thereof) are tax-deductible depending on your income or access to a plan sponsored by an employer.
3. Roth IRA
Roth IRAs are another type of individual retirement account. In terms of withdrawal age and contribution limits, it is identical to the traditional IRA. The tax benefits of a Roth401(k) are however identical. After-tax contributions are made and the money won't be subject to tax again.
Roth IRAs have an advantage that allows you to withdraw more money earlier if you wish. You can withdraw your Roth IRA funds at any time after you have opened it for at least five year. This is because you already paid taxes on the contributions. This exception applies only to your contributions and not to your investment earnings.
The income limit for Roth IRA eligibility is also subject to change. If you aren't within those limits, you will not be able contribute to the plan directly.
4. Plan 403(b).
The 403(b), also known as a taxsheltered annuity, or TSA, is a retirement plan that is offered at work by non-profits and public schools. These plans offer many of the same features as a 401k plan, such as their withdrawal rules and contribution limits.
The key difference between 401 (k) and 403 (b) plans is that you may be eligible to contribute more money. Employers with 15 years service can contribute less to one of these plans:
- $15,000 reduced by elective deferrals from prior years
- Five thousand times the number years of service, less the total elective deferrals in earlier years
5. 457(b), Plan
A 457(b), or deferred compensation plan, is offered to many state and municipal employees as well as non-profit organisations. This plan offers the same contribution limits and benefits as 401(k). They may also allow Roth and traditional contributions.
The key difference between 401 (k) and 457 (b) plans is the fact that 457 (4b) plans aren't qualified and aren’t governed under ERISA. Distributions made before the age of 59 1/2 don't attract a 10% penalty for early withdrawals unless they have been rolled over money from another retirement plan.
6. SEP IRA
SEP IRA stands for simplified employee pension plan. This retirement plan is designed for self-employed people. SEP IRAs can be set up by any size business, but are especially popular among small businesses.
A SEP IRA allows a business to contribute up to 25% or $61,000 depending on the employee's salary. Employees cannot contribute to the account, unlike 401(k), but only the employer can. The employer must also contribute equally to all eligible employees. This is not a dollar amount but a percentage of the employee's salary.
These plans are popular with solopreneurs, who can contribute large amounts to their own requirements and don't need to save for employees due to the high contribution limit.
SEP IRAs cannot be used to make pre-tax contributions, unlike other retirement plans. A Roth SEP IRA cannot be opened. These plans have the same withdrawal restrictions as other retirement plans.
7. Solo 401(k)
Solo 401(k), also known as a one-participant plan 401(k), is another type retirement plan for self-employed people. This plan is only for the business owner or their spouse. Employers cannot contribute on behalf employees.
Solo 401(k) allows self-employed individuals to contribute up to 100% of their annual compensation, subject to the annual contribution limit at $20,500. In addition to the contributions that employees make, self-employed workers can also contribute to their account for their business. Employer contributions may be as high as 25% of the compensation, but the calculation for self-employed people is more precise. To determine the maximum allowable amount, it is a good idea to consult a tax advisor.
Solo 401(k), like other retirement plans, can accept traditional or Roth contributions. Participants can then choose which tax benefit they prefer. These plans have the same withdrawal limitations as other retirement plans.
8. Health Savings Account
The HSA (health savings account) is a unique option on this list as it is not designed to help you save for retirement. It's instead designed to help pay for healthcare expenses.
If workers have a high-deductible plan that covers health insurance, they can contribute to an HSA. This means that the deductible must be at least $1,400 per person and $2,800 per family. An individual can contribute $3,650 annually, while a family can contribute $7,300.
HSAs have a triple tax advantage. Your contributions, just like traditional 401(k), are exempt from tax. You can also invest your HSA money, which grows tax-free so long as it remains in the account. You won't have to pay taxes on any withdrawals if you use the money for qualified medical expenses. You'll also pay 20% penalty if you withdraw the money to pay income taxes.
A unique retirement savings feature is also available in HSAs. You can access your account money for any purpose, including non-medical ones, once you turn 65. There is no penalty on your distributions. You will still have to pay income taxes, just like a 401 (k) plan.
9. Taxable brokerage account
A taxable brokerage account allows anyone to invest in their financial goals regardless of their employment status, income or employer.
There are clear benefits to taxable brokerage accounts. You can put as much money as you like without limiting your contribution. You can withdraw your money at any moment and use it for any purpose without worrying about penalties.
Taxes are another major disadvantage of taxable brokerage accounts. This type of account has no tax benefits. After-tax money is used to invest and taxes are paid on the investment growth. Two types of taxes can be applied to assets in your taxable brokerage account.
- Normal income taxes: These taxes will be paid on short-term capital gains and ordinary dividends as well as interest income. The tax rate will be the same as your normal income tax rate.
- Long-term Capital gains taxes : These taxes will be paid on qualified dividends and long-term capital gains. Your income will determine which tax rate you pay.
10. Real Estate
Real estate is not an investment account, unlike the other 401(k), alternatives we have on our list. It's an asset that you can invest in. It is not designed to be used for retirement savings but many people do use it for that purpose.
Two ways can real estate investors make money are possible. They can sell property that has appreciated over time to make money. They could also rent out their real estate.
Renting out properties can provide regular cash flow. Rent that tenants pay each month can provide a steady source of income during retirement.
There are some downsides to owning property. Instead of having your money available and liquid in an investment account it is highly illiquid when you own a piece real estate. It may provide a monthly income source, but you also have a substantial amount of money invested in a tangible asset.
Next steps for you
You have many options for saving for retirement, regardless of whether you have a 401k plan. The right tools can help you jumpstart your retirement plans. The Personal Capital Retirement Planner will help you achieve your retirement goals. It estimates whether you are on track for retirement and how much money you should be saving each month to retire on schedule.
Get started with the Personal Capital's free financial tools
Frequently Asked Questions
Is buying gold a good option for retirement planning?
Although buying gold as an investment might not sound appealing at first, when you look at the average annual gold consumption worldwide, it is worth looking into.
Physical bullion is the most popular method of investing in gold. There are many ways to invest your gold. You should research all options thoroughly before making a decision on which option you prefer.
If you're not looking to secure your wealth, it may be worth considering purchasing shares in mining equipment or companies that extract gold. If you require cash flow, gold stocks can work well.
You can also invest your money in exchange-traded fund (ETFs), which give you exposure to the gold price by holding securities related to gold. These ETFs usually include stocks of precious metals refiners or gold miners.
What amount should I invest in my Roth IRA?
Roth IRAs are retirement accounts that allow you to withdraw your money tax-free. These accounts cannot be withdrawn until you turn 59 1/2. There are some rules that you need to keep in mind if you want to withdraw funds from these accounts before you reach 59 1/2. First, you can't touch your principal (the initial amount that was deposited). This means that you can't take out more money than you originally contributed. If you take out more than the initial contribution, you must pay tax.
The second rule says that you cannot withdraw your earnings without paying income tax. So, when you withdraw, you'll pay taxes on those earnings. Let's take, for example, $5,000 in annual Roth IRA contributions. In addition, let's assume you earn $10,000 per year after contributing. Federal income taxes would apply to the earnings. You would be responsible for $3500 That leaves you with only $6,500 left. Since you're limited to taking out only what you initially contributed, that's all you could take out.
If you took $4,000 from your earnings, you would still owe taxes for the $1,500 remaining. In addition, 50% of your earnings will be subject to tax again (half of 40%). So even though you received $7,000 in Roth IRA contributions, you only received $4,000.
There are two types if Roth IRAs: Roth and Traditional. A traditional IRA allows for you to deduct pretax contributions of your taxable income. Your traditional IRA can be used to withdraw your balance and interest when you are retired. You can withdraw as much as you want from a traditional IRA.
A Roth IRA doesn't allow you to deduct your contributions. After you have retired, the full amount of your contributions and accrued interest can be withdrawn. Unlike a traditional IRA, there is no minimum withdrawal requirement. You don’t have to wait for your turn 70 1/2 years before you can withdraw your contributions.
Is gold a good investment IRA option?
For anyone who wants to save some money, gold can be a good investment. It is also an excellent way to diversify you portfolio. There is much more to gold than meets your eye.
It's been used throughout history as a currency, and even today, it remains a popular form of payment. It is sometimes called the “oldest currency in the world”.
But unlike paper currencies, which governments create, gold is mined out of the earth. It's hard to find and very rare, making it extremely valuable.
Gold prices fluctuate based on demand and supply. When the economy is strong, people tend to spend more money, which means fewer people mine gold. As a result, the value of gold goes up.
On the flipside, people may save cash rather than spend it when the economy slows. This increases the production of gold, which in turn drives down its value.
This is why gold investment makes sense for both individuals and businesses. If you make an investment in gold, you can reap the economic benefits whenever the economy is growing.
Additionally, you'll earn interest on your investments which will help you grow your wealth. Plus, you won't lose money if the value of gold drops.
Can I keep physical gold in an IRA?
Gold is money and not just paper currency. People have used gold as a currency for thousands of centuries to preserve their wealth and keep it safe from inflation. Investors today use gold to diversify their portfolios because gold is more resilient to financial turmoil.
Many Americans now invest in precious metals. While owning gold doesn't guarantee you'll make money investing in gold, there are several reasons why it may make sense to consider adding gold to your retirement portfolio.
One reason is that gold historically performs better than other assets during financial panics. Gold prices rose nearly 100 percent between August 2011 and early 2013, while the S&P 500 fell 21 percent over the same period. Gold was one asset that outperformed stocks in turbulent market conditions.
Another advantage of investing in gold is that it's one of the few assets with virtually zero counterparty risk. Even if your stock portfolio is down, your shares are still yours. But if you own gold, its value will increase even if the company you invested in defaults on its debt.
Finally, gold offers liquidity. This means that, unlike most other investments, you can sell your gold anytime without worrying about finding another buyer. Because gold is so liquid compared to other investments, buying it in small amounts makes sense. This allows you to take advantage of short-term fluctuations in the gold market.
Can I buy or sell gold from my self-directed IRA
You can purchase gold with your self-directed IRA, but you must first open an account at a brokerage firm like TD Ameritrade. If you already have a retirement account, funds can be transferred to it.
The IRS allows individuals contributing up to $5.500 each ($6,500 if married, filing jointly) into a traditional IRA. Individuals can contribute up $1,000 per annum ($2,000 if they are married and jointly) directly to a Roth IRA.
If you do decide you want to invest your money in gold, you should look into purchasing physical bullion instead of futures contracts. Futures contract are financial instruments that depend on the gold price. They allow you to speculate on future prices without owning the metal itself. However, physical bullion is real gold or silver bars you can hold in your hands.
What Does Gold Do as an Investment Option?
The price of gold fluctuates based on supply and demand. Interest rates also have an impact on the price of gold.
Gold prices are volatile due to their limited supply. You must also store physical gold somewhere to avoid the risk of it becoming stale.
What are the pros and disadvantages of a gold IRA
An Individual Retirement account (IRA) is a better option than regular savings accounts in that interest earned is exempted from tax. An IRA is a good choice for those who want a way to save some money but don’t want the tax. This type of investment has its downsides.
To give an example, if your IRA is withdrawn too often, you can lose all your accumulated funds. Also, the IRS may not allow you to make withdrawals from your IRA until you're 59 1/2 years old. You will likely have to pay a penalty fee if you withdraw funds from an IRA.
Another disadvantage is that you must pay fees to manage your IRA. Many banks charge between 0.5%-2.0% per year. Other providers charge monthly management costs ranging from $10-50.
If you prefer to keep your money outside a bank, you'll need to purchase insurance. Most insurers require you to own a minimum amount of gold before making a claim. Insurance that covers losses upto $500,000.
If you decide to open a gold IRA, it is important to know how much you can use. You may be limited in the amount of gold you can have by some providers. Some providers allow you to choose your weight.
It's also important to decide whether or not to buy gold futures contracts. Physical gold is more costly than gold futures. Futures contracts provide flexibility for purchasing gold. They let you set up a contract that has a specific expiration.
You'll also need to decide what kind of insurance coverage you want. Standard policies don't cover theft protection, loss due to fire, flood or earthquake. It does provide coverage for damage from natural disasters, however. If you live near a high-risk region, you might want to consider additional coverage.
Insurance is not enough. You also need to think about the cost of gold storage. Storage costs are not covered by insurance. For safekeeping, banks typically charge $25-40 per month.
To open a IRA in gold, you will need to first speak with a qualified custodian. A custodian keeps track of your investments and ensures that you comply with federal regulations. Custodians don't have the right to sell assets. Instead, they must hold them as long as you request.
After you have decided on the type of IRA that best suits you, you will need to complete paperwork detailing your goals. Your plan should include information about the investments you want to make, such as stocks, bonds, mutual funds, or real estate. You should also specify how much you want to invest each month.
After filling in the forms, please send them to the provider. After receiving your application, the company will review it and mail you a confirmation letter.
When opening a gold IRA, you should consider using a financial planner. A financial planner is an expert in investing and can help you choose the right type of IRA for you. They can also help reduce your costs by suggesting cheaper options for purchasing insurance.
- Indeed, several financial advisers interviewed for this article suggest you invest 5 to 15 percent of your portfolio in gold, just in case. (aarp.org)
- Contribution limits$6,000 (49 and under) $7,000 (50 and up)$6,000 (49 and under) $7,000 (50 and up)$58,000 or 25% of your annual compensation (whichever is smaller) (lendedu.com)
- Gold is considered a collectible, and profits from a sale are taxed at a maximum rate of 28 percent. (aarp.org)
- If you take distributions before hitting 59.5, you'll owe a 10% penalty on the amount withdrawn. (lendedu.com)
- You can only purchase gold bars at least 99.5% purity. (forbes.com)
- 7 U.S. Code SS7 – Designation board of trade as contract marketplaces
- 26 U.S. Code SS 408 – Individual retirement plans
- Saddam Hussein's Invasion Helped Uncage a Bear In 1990 – WSJ
- You want to keep gold in your IRA at home? It's Not Exactly Legal – WSJ
- Fraud Advisory: Precious Metals Fraud
By: Shannon Lynch, CFP®
Title: 401k Alternatives: 10 Potential Different Options
Sourced From: www.personalcapital.com/blog/retirement-planning/401k-alternatives/
Published Date: Mon, 17 Oct 2022 22:37:37 +0000