401(k) Alternatives: How To Save for Retirement Without a 401(k)

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A company-sponsored 401(k) plan is just one option to save for retirement. If you work for a company that doesn’t offer a 401(k), or if you are self-employed and don’t have access to a group-sponsored retirement plan, you can still build wealth by opening up your own alternative retirement plans.

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Types of Retirement Savings Alternatives

If an employer-sponsored 401(k) isn’t an option for you — or if you just want to have more than one retirement account — you should open another retirement account as soon as you can. Consider these ways to save for retirement without a 401(k):

1. Traditional IRA
2. Roth IRA
3. SEP IRA
4. Solo 401(k)
5. Health Savings Account
6. Long-term investments

Pros and Cons of 401(k) Plans

Although 401(k) plans are a popular retirement savings choice, they’re not perfect. Here’s a breakdown of the advantages and disadvantages.

Pros

• Tax-deferred growth
• Automated savings because the money is automatically withheld from your paycheck, so you don’t have to worry about making deposits yourself.
• Matching employer contributions that provide free money to the 401(k)

Cons

• Yearly contribution limits
• Early withdrawal penalties
• Potential for losses if the investments in your 401(k) don’t perform well

Qualified and Non-Qualified Accounts: What’s the Difference?

Before you look at the different types of accounts you might open, Julian Schubach, vice president of wealth management at ODI Financial, said it’s important to differentiate between qualified and non-qualified accounts. 

Qualified Accounts

Schubach defined a qualified account as anything that can be considered a retirement account. This is an account with tax favorability and specific rules that govern the use of your savings.

A few examples of qualified accounts include a traditional IRA, Roth IRA, SEP IRA and Solo 401(k).

Non-qualified Accounts

A non-qualified account is a non-retirement account. This is money you already have paid income taxes on and is subject to additional taxes only on investment gains.

Most non-qualified accounts may be withdrawn from at any time with no penalties, unless you purchase a product such as a CD or annuity that may carry a surrender charge.

What To Know About 401(k) Alternatives

If you are considering options to a 401(k), keep reading to learn about the various alternative choices.

Traditional IRA

If you do not have access to a 401(k) program, a good alternative is to open an individual retirement account. You can choose between a traditional IRA and Roth IRA. 

Traditional IRAs are tax-deferred, meaning you may be eligible for a tax deduction each year you contribute. Greg Middendorf, CFP and partner at HCM Wealth Advisors, said earnings grow tax-deferred, but you’re subject to ordinary income taxes when you make a withdrawal. Those who withdraw money before age 59½ may be hit with a 10% penalty, which Middendorf said is a good inducement to keep your money growing.

Here are the rules for 2024:

• For most people, the maximum amount you can contribute to an IRA is $7,000 a year.
• If you are 50 or older you get an additional “catch-up” contribution of $1,000 to bring the total to $8,000.

Roth IRA

You will not receive a tax deduction when contributing to a Roth IRA account. However, Middendorf said you can withdraw earnings tax-free at age 59½ if you have held the Roth for five years.

“You’re subject to a 10% penalty if you withdraw earnings before 59½, but there’s never a penalty for withdrawing the money you contributed,” Middendorf said.

Contributions to a Roth IRA count toward the $7,000 maximum contribution for 2024, or $8,000 if you’re age 50 or older.

Brian Carney, co-founder and CEO of RiversEdge Advisors, said opening a Roth IRA is a tremendous way to save for retirement, even if you are offered a retirement plan through your employer.

“As long as the investor is under certain income limits, they have the ability to contribute to the maximum limit to a Roth IRA using after-tax dollars, meaning it has already been taxed through a paycheck,” Carney said. “Those dollars will grow completely tax-free and can be distributed at required ages completely tax-free. By paying taxes on the contributions and none of the growth, it is akin to paying tax on the seed, not the harvest.”

Simplified Employee Pension (SEP) IRA

If you want to save more than $7,000 in a tax year, one option is a Simplified Employee Pension IRA. Here’s what to know:

• If you are a freelancer or otherwise earn 1099 income, you might be eligible to contribute 25% of your adjusted gross income, up to $69,000, into a SEP IRA account.
• SEP IRA accounts are tax-deferred and provide a potential tax deduction each year a contribution is made.
• If a freelancer has any employees, the SEP IRA will require the owner to make contributions for their employees that are the same percentage of income they contributed for themselves.

Solo 401(k) Plans for Self-Employed Individuals

A Solo 401(k), also known as a one-participant 401(k), is ideal for those who have an LLC or corporation and are the sole employee taking W-2 income. Here’s a look:

• As the only participant in your Solo 401(k), you can make up to $23,000 in elective deferrals for 2024, plus up to 25% of your net self-employment earnings, according to the IRS. Net earnings are your business income minus one half of your self-employment tax and your personal contribution.
• The total maximum contribution is $69,000 for 2024, not including catch-up contributions, according to the IRS.
• You can invest Solo 401(k) funds in either a traditional or Roth IRA.

Health Savings Account as a Retirement Savings Option

If you have a qualified high-deductible health plan through your employer or as a self-employed individual, you may qualify for an HSA.

“Similar to an IRA, an HSA lets you make annual contributions and offers significant tax perks,” Middendorf said. “It’s a way to save for current healthcare costs as well as for the future and can be a great complement to an IRA.”

These are important rules to know about HSAs:

• If eligible, the HSA contribution limits for 2024 are $4,150 for self-only coverage and $8,300 for family coverage.
• People 55 and older can contribute an additional $1,000 as a catch-up contribution.

Although you can withdraw the funds at any time, you’ll pay income tax and a 20% penalty on withdrawals you make before age 65 that are not used exclusively for qualified medical expenses. After age 65, you’ll be taxed on non-qualified withdrawals but won’t incur a penalty.

Taxable Investment Accounts

Taxable investment accounts include assets you can buy and sell whenever you like, such as  stocks, bonds and exchange-traded funds. These can be opened at traditional brokers, online brokers, robo-advisors and other financial firms. In this case, “taxable” means that when you earn dividend income or profits the sale of assets, they must be reported to the IRS and state tax agencies for income tax purposes.

Tax-Deferred Annuities

The Securities and Exchange Commission describes an annuity as a “contract between you and an insurance company that is designed to meet retirement and other long-range goals.”  One advantage of an annuity is that it offers tax-deferred earnings growth. In some cases, you might also get a death benefit that pays beneficiaries a specified minimum amount, such as your total purchase payments.

You can make withdrawals either through a lump-sum payment or monthly installment payments that could last the rest of your life. Once you start making withdrawals from the annuity, any gains are taxed at the ordinary income rate. If you withdraw your money early from an annuity, you may have to pay surrender charges to the insurance company, and possibly additional tax penalty payments.

Here are the three basic types of annuities:

• Fixed: With a fixed annuity, the insurer agrees to pay you a set interest rate during the period when your investment is still growing. The insurer will also makes periodic payments of a specific dollar amount. The payments can cover a pre-determined period, such as 20 years, or an indefinite period such as your lifetime or the lifetime of you and your spouse.
• Variable: A variable annuity lets you choose how to invest the money you put into the account. These investments typically involve mutual funds, and the rate of return depends on the performance of the funds. The main risk with a variable annuity is that you could lose money.
• Indexed: In an indexed annuity, your return is based on changes in market indexes such as the S&P 500 Composite Stock Price Index.

Real Estate

Investing in real estate can be lucrative if you choose the right asset at the right time, but it can also be risky due to the volatility of real estate markets. That’s especially true of commercial real estate, though you also face risk with residential real estate. The good news is, there are ways to reduce some of that risk by choosing different types of investments that don’t require huge sums of cash.

Some of the more popular ways to invest in real estate include the following:

• Buying physical real estate.
• Investing in real estate securities.
• Joining real estate investment groups, which are private group of investors who pool their funds to buy and manage real estate.
• Investing in a Real Estate Investment Trust or REIT, which is a company that owns portfolios of income-generating real estate and related assets.

Heather Taylor and Daria Uhlig contributed to the reporting for this article.

Information is accurate as of May 10, 2024.

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