Alternative Ways to Save for Retirement: Top 5 Options

Saving for retirement is an extremely important step for protecting your financial future. In fact, the earlier you can start saving for retirement, the better. Perhaps you have a 401(k) set up through your employer. This can be a great first step, especially if your employer offers matching funds. However, it’s not the only option you have for retirement savings. There are a number of alternative ways to save for retirement. Using a combination of retirement savings techniques can help you better prepare for the future. This article takes a look at five other ways you can save for retirement besides a 401(k).

Roth IRA

A Roth IRA is a type of individual retirement account. So, it can be a good alternative way to save for retirement if you want to defer your tax benefits until you retire. Unlike a traditional IRA, you can make contributions into a Roth IRA account on a post-tax basis. Additionally, the benefit of this option is that you don’t owe taxes when you withdraw these funds. There are limits to how much you can contribute to a Roth IRA each year. The maximum contribution amounts for 2023 are $6,500 or $7,500 if you’re over 50. Depending on your income, you may only be able to make partial contributions.

Pros:

Tax-free growth on investment
Tax-free distributions at any age
No minimum distribution requirements
Penalty-free distributions at age 59.5 and over

Cons:

Post-tax contributions
10% penalty for early withdrawal
Income eligibility requirements

Is It Better to Have an IRA or 401(k)?

Many investors prefer a Roth IRA over a 401(k). If your employer offers matching 401(k) contributions, that may be the better option. Also,you can maximize your investment by having both a 401(k) and a Roth IRA account.

SEP IRA

If you’re self-employed or a small business owner, you might consider investing in a SEP-IRA account. The Simplified Employee Pension IRA allows business owners to contribute to the account and claim these contributions as a business expense. This type of retirement fund is solely funded by the employer, meaning individual employees can’t contribute funds to their own accounts.

However, SEP-IRA accounts are easier to manage than 401(k) accounts. This option also allows you to make contributions whenever you’re able to do so versus on a biweekly or monthly basis.

Pros:

Less complicated than managing a 401(k) plan
Can withdraw funds without penalty at age 59.5 and older
Contributions can be listed as a business expense

Cons:

Can only be funded by employers
Contributions must be equally split among all employees
Can’t exceed contribution limits
Minimum distribution requirements

Taxable Investment Account

An investment account, also referred to as a brokerage account, is another retirement option other than a 401(k). Typically, you work with an investment broker to set up an account and have a choice of several investment options. The good news is that you can have both a 401(k) account and a taxable investment account. Investing in both types of retirement accounts can help you save more for retirement.

Pros:

No annual contribution limits
Variety of investment options
No income requirements
After-tax contributions
No minimum distribution requirements

Cons:

Offers no tax benefits
Distributions are subject to capital gains tax
Owe taxes on annual earned income, including dividends and interest

HSA (Health Savings Account)

Other ways to save money besides a 401(k) include health savings accounts. HSA accounts are specifically for people with high-deductible health insurance plans. These plans can help seniors pay for out-of-pocket medical expenses tax-free both before and during retirement.

Pros:

After-tax contributions
Tax-free distributions for qualified medical expenses
Penalty-free withdrawals for 65 and over
No minimum distribution requirements

Cons:

20% penalty for early withdrawals not related to medical expenses
Can’t exceed contribution limits
Only eligible for those with high-deductible insurance plans

Deferred Variable Annuity

A deferred variable annuity is one of the more complex retirement plans. It works as a contract with an insurance company to provide regular funds or a lump sum at a later date. You fund your account through regular premium payments and the insurance company invests these funds on your behalf.

Pros:

No contribution limits
Death benefits make it exempt from probate
Tax-deferred contributions
Guarantee of regular income during retirement

Cons:

Possible high maintenance fees
Taxable withdrawals
Complex policies are hard to understand and manage

Conclusion

These alternative ways to save for retirement besides a 401(k) can allow you to make investments to ensure you’re protected financially during your retirement years. When possible, you may want to set up multiple retirement and investment accounts to ensure you have enough money saved for retirement.

It’s also best to consult with a retirement professional who can explain what other retirement options besides 401(k) accounts are available. This type of professional can also help answer any questions you have about retirement accounts, such as questions about Roth IRA contribution limits or 401(k) withdrawals. Also, a retirement professional can also help you manage your account and help you make important decisions regarding your retirement savings plan.

Learn more about savers’ tax credits and how they can benefit you.