An employer-sponsored 401(k) plan can be a salient way to save up for retirement.
Yet not everyone has access to a 401(k). Data shows that one in three US workers does not have an employer-sponsored 401(k) plan.
If you are one among them, you can save up for retirement using one of the following alternative retirement accounts.
It’s one of the best alternatives available to a 401(k). Like a 401(k), your annual contributions to a traditional IRA are tax-deductible, though the contribution limits are lower.
The earnings on your investment will grow on a tax-deferred basis. You have to pay taxes only when you start withdrawing funds from the account.
A traditional IRA thus can be a good choice if you are likely to be in a low tax bracket after you retire.
A Roth IRA can not only be used to save up for retirement but also to pass on your wealth to your loved ones.
The annual contribution limits for a Roth IRA are the same as a traditional IRA. The difference is that your contributions are taxable today but you do not have to pay taxes when you start withdrawing funds from the account.
The positive aspect about a Roth IRA is that you are not required to withdraw funds from the account at all. You can allow your investment to grow in value as long as you are alive and then pass it on to your loved ones.
A solo 401(k), also referred to as one-participant 401(k), is a retirement plan which is tailor-made for independent contractors, consultants, and sole proprietors with no employees.
You can set up a traditional or Roth solo 401(k) account, depending on whether you want to pay taxes on your contributions or withdrawals.
One of the biggest advantages of a solo 401(k) account is that if you are high earner you can contribute a lot of money to these accounts tax-deferred.
a Simplified Employee Pension (SEP) IRA is a retirement account which is ideal for self-employed people. It works similar to a traditional IRA; your contributions are not taxed but your withdrawals are.
Your earnings will continue to grow in value on a tax-deferred basis until you start making withdrawals.
As a self-employed person, you can contribute up to 25% of your annual earnings up to a generous high limit every year. You can start withdrawing funds from your SEP IRA from the age of 59 ½ if you wish to.
Once you reach the required minimum distribution age it is mandatory for you to withdraw funds from your account every year.
A standard brokerage account can also be used to save up for retirement, as long as you are cautious about how you invest your money.
The upside of a brokerage account is that there are no contribution limits and if you make smart investment choices, you can get powerful returns.
The downside is that there are no tax benefits whatsoever.