How to Save For Retirement Without a 401(k)

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How to Save For Retirement Without a 401(k)

With so many retirement plans on the market, it can be difficult to sift through them all and find the best one for you.

401(k)s have been a popular tool for retirement saving since the early 80’s. While they do offer advantages over some other plans, 401(k)s might not be the best choice for everyone.

One disadvantage of using a 401(k) is that you could end up paying more in taxes in retirement. Income and capital gains taxes can take a big bite out of your retirement funds— especially if you end up in a higher tax bracket than when you initially started saving for your retirement.

Another reason someone might opt for a different method of retirement saving is the fees associated with 401(k)s. 401(k)s have administrative fees attached. Depending on how high the fees are, it might not be worth it to use a 401(k).

Should you decide that a 401(k) isn’t for you, don’t worry. There are plenty of alternatives to 401(k)s. Odds are you’ll find something that is better suited to your needs.

401(k) Alternatives

It’s important to find the right investment tool for your circumstances and goals. There isn’t a one-size-fits-all plan when it comes to saving for your retirement.

One popular alternative to 401(k)s is an individual retirement account or IRA. There are many different types of IRAs to choose from, all with their own pros and cons. Some IRAs are for individuals and others for small businesses also called IRA based employer sponsored plans, but all have tax benefits and tax advantages.

Even if you are currently enrolled in a 401(k) plan, it is possible to roll your 401(k) into an IRA. However, the plan must allow a rollover while you’re still working. This is called an in-service distribution. If you are no longer employed with the company that sponsored your plan, you shouldn't have any trouble doing a direct rollover to an IRA.

Traditional IRA

With a traditional IRA, contributions are made using either your earned income for the year but is limited by an annual limit. Contributions are generally tax deductible unless you are participating in an employer sponsored plan like a 401(k). If participating in an employer sponsored plan contributions could be tax-deductible provided you meet the income eligibility. There are no income limits for owning a Traditional IRA, however, there are limits to how much of the contributions will be tax-deductible.

The maximum amount that you can contribute to your Traditional IRA in 2022 is $6,000 and $6,500 for 2023 if you are below age 50 by the end of the tax year. If you are 50 years or older, you may contribute an additional $1,000 for 2022 and 2023 respectively. 

Any gains in your portfolio are tax-deferred — meaning you don’t have to pay taxes on them until you start making withdrawals. After you reach 59.5 years of age distributions are also penalty free.

Traditional IRAs were designed as a supplement to an employer sponsored plan. Traditional IRAs are easy enough to get started. Anyone regardless of age and with earned income is eligible for a Traditional IRA. They can be opened through your bank, an online brokerage, or an investment company. For minors a parent or legal guarding may need be involved in setting up the IRA.

Roth IRA

Just like with a Traditional IRA, a Roth IRA is funded with post-tax money since the contribution is not deductible. One big difference between Roth and Traditional IRAs is that with a Roth IRA you can eventually withdraw earnings tax and penalty free, provided that it has been 5 years since your first contribution and you have reached on of these events- death, disability, attain age 59 ½ or first time home purchase (capped at $10,000).

Unlike a Traditional IRA whose earnings grow tax-deferred, earnings made to a Roth IRA grow tax-deferred as well but eventually may be distributed tax-free. While this is great for when you are ready to retire, it doesn’t provide you with the immediate tax-deferred benefits of a tax deduction that comes with a Traditional IRA.

A Roth IRA is good for those who want to eliminate taxation when they reach retirement.

Real Estate IRA

Investing in real estate through a self-directed IRA is a great way to acquire properties. A Real Estate IRA can be any one of the following IRAs;

A real estate IRA is just a name used for any retirement savings and investment account with real estate assets. All IRA rules still apply.

There are a number of ways in which you can invest in real estate through your IRA. You can buy a property outright using cash from your IRA account. But you can also use your IRA to get a non-recourse loan to purchase a property. Or bring in additional investors or IRAs.

One benefit of using an IRA for real estate is that if you purchase a property for the purpose of renting it out, you don’t have to pay taxes on the money collected provided it goes back into your IRA.

Because a real estate IRA allows you to invest in more than just mutual funds, stocks, and bonds, it’s a great way to diversify your retirement portfolio. Should the economy start to tank, you’ll be glad to have a well-diversified portfolio. These types of real estate investments are not normally facilitated through a regular brokerage account.


Solo 401(k)

This is a bit different from a standard 401(k). It is designed for self-employed and small businesses  with no rank-and-file employees working for their business. It's ideal for solopreneurs.

You may contribute up to $66,000 in 2023. A Solo 401(k) allows for a catch-up contribution of $7,500 in 2023 after they have met their maximum annual deferral limit. Contributions by an employee to a Solo 401(k) can either be pre-tax or designated Roth (post-tax).

Pre-tax contribution reduce the employee’s taxable income therefore you will benefit by having less taxable income for the year. Designated Roth employee contributions on the other hand do not reduce the employee’s income for the year but earnings on the investments under this account may be tax-free in the future. 

Above and beyond the employees contribution the employer can also provide a profit sharing contribution which is tax deductible to the employer. For a sole proprietor the employer and employee are one and the same.

As you can see, there are many alternatives to using a 401(k) for your retirement. Always look for the way to maximize your savings. If you are a small business owner, look for plans that help lower your taxable income. If you have a spouse, you may consider a Spousal IRA.

Finding the right retirement account or plans is important. Going it alone can be a daunting task. Consider speaking with a financial professional to get a better understanding of what types of plans are best for you to save for the future.

How We Help

IRAR has been helping people plan for retirement for over 25 years. If you are interested in learning more about IRAs or Solo 401(k) and how they can help you plan for the future, please contact us for a free consultation.

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