Many businesses allow employees to save for retirement through a sponsored 401(k) plan, with some even matching employee contributions up to a specific amount. However, only some have access to a 401(k), and 74% of small businesses don’t offer one. Moreover, having a 401(k) doesn’t guarantee it’s the best plan for you.
Your 401(k) might have limited investment options or high administrative fees, eroding your returns. If you’re dissatisfied with your company’s 401(k) plan, rest assured that you have other options. Here are two alternatives to consider.
Invest in an IRA
You can contribute to an IRA if you have earned income. With an IRA, you’ll typically have more investment options, such as individual stocks unavailable in 401(k) plans.
With a traditional IRA, you’ll receive a tax break on contributions, but withdrawals will be taxed during retirement. In contrast, a Roth IRA provides no tax break on contributions but offers tax-free investment gains and withdrawals.
For 2023, contribution limits for traditional and Roth IRAs are $6,500 if you’re under 50 and $7,500 if you’re 50 or older. While 401(k)s have higher contribution limits ($22,500 and $30,000, respectively), this may not matter if you can only save a few thousand dollars annually for retirement.
Invest in a Taxable Brokerage Account
Taxable brokerage accounts don’t provide tax benefits but offer more flexibility.
IRAs and 401(k)s impose penalties for withdrawals before age 59 1/2, whereas taxable brokerage accounts do not. If you plan to retire early, consider allocating some savings to a taxable brokerage account.
There are no annual contribution limits for taxable brokerage accounts, allowing you to invest as much as you want, such as a $10,000 bonus, into your retirement account.
Options Beyond a Subpar 401(k)
If you’re unhappy with your employer’s 401(k) plan, contribute enough to claim the full company match to get free money. Beyond that, consider an IRA or taxable brokerage account for your long-term savings. If your company’s 401(k) plan doesn’t offer a match, feel confident exploring alternative saving options.
Consider a Health Savings Account (HSA)
If enrolled in a high-deductible health plan (HDHP), you can contribute to a Health Savings Account (HSA) to save for retirement. HSAs offer triple tax advantages: contributions are tax-deductible, investments grow tax-free, and withdrawals for qualified medical expenses are tax-free. Unused funds can be used for non-medical expenses after age 65, though they will be taxed as ordinary income.
For 2023, HSA contribution limits are $3,650 for individuals and $7,300 for families. If you’re 55 or older, you can contribute an additional $1,000 as a catch-up contribution.
Diversify Your Savings
Diversifying your retirement savings across multiple account types, such as a 401(k), IRA, taxable brokerage account, and HSA can provide you with more options and flexibility. Each account has its benefits and limitations, but combining them allows you to create a more comprehensive retirement savings strategy.
Evaluate Your Options Regularly
Reassess your retirement savings options periodically, significantly if your employer improves its 401(k) plan or your financial situation changes. Periodic evaluations will help maximize your savings strategy and optimize your retirement preparedness.
If you’re dissatisfied with your company’s 401(k) plan, alternative savings options are available to help you reach your retirement goals. You can create a personalized retirement savings plan that suits your needs and preferences by exploring and combining IRAs, taxable brokerage accounts, HSAs, and a modified 401(k) strategy. Regularly assess your options and adjust your plan to maximize your retirement savings potential.
