401(k) Alternatives to Consider

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Updated on Thursday, December 10, 2020

Investing in a work-sponsored 401(k) account is one of the easiest ways to save for retirement. But if your work doesn’t offer one or it isn’t that great, there are 401(k) alternatives you can turn to for your investment needs.

Why you should consider 401(k) alternatives

Having a 401(k) through your job is a simple step to investing in your retirement without much work, but there are some downsides of having one.

Employer-sponsored plans handle a lot of the labor for you, which is one major benefit to having one. However, you may still be responsible for any fees associated with having a retirement plan through your work. It’s possible you’ll never notice these fees either, as it’s not a line-item on your paycheck and is taken directly from your investment funds.

A TD Ameritrade survey found that about one in four Americans know how much they’re paying in 401(k) fees compared to 96% of Americans that know how much their streaming services cost (such as Netflix and Hulu). 401(k) fees can cost upwards of 5%, while Robo-advisors — like Betterment — only charge an annual fee of 0.25%.

Depending on your employer and specific plan, you may run into some other issues such as limited investment options and restricted flexibility compared to a retirement plan you handle on your own.

401(k) alternatives

While you should take advantage of an employer-sponsored 401(k) plan if it’s available, it doesn’t need to be the only plan you have. Here are some other options worth considering:

Roth IRA

A Roth IRA is an individual retirement account that allows you to contribute up to $6,000 a year. Withdrawals are tax-deductible and you can make taxable contributions for as long as you’d like with no age limitations.

For Roth IRAs, there is an income requirement to meet. For the 2021 tax year, you’ll need to make less than $140,000 as a single filer or less than $208,000 if filing jointly to participate.

Traditional IRA

A Traditional IRA is also an individual retirement account that allows you can contribute up to $6,000 each year. Taxes work opposite of a Roth, and instead of tax-deductible withdrawals, your contributions are taxed. This means all the money you put into a Traditional IRA is tax-free.

Traditional IRAs have a deadline that prevents you from making contributions — and requires minimum distributions — by 70 and a half years old. Your contributions are taxed once you start taking money out.


A SEP IRA, or Simplified Employee Pension, is an individual retirement account for sole proprietors or business owners with one or more employees. This plan allowed you to save up to 25% of your gross annual salary if you’re self-employed.

SEP IRAs are like traditional 401(k) plans — your contributions aren’t taxed but your withdrawals are. Like a traditional IRA, you’re required to make withdrawals starting at 70 and a half years of age.

Solo 401(k)

A Solo 401(k) is a lot like a SEP IRA in that it’s made for self-employed workers who don’t otherwise have a 401(k) option through their workplace.

For a Solo 401(k), a portion of your income is deferred so it can grow tax-free until retirement. Like a traditional 401(k) plan, you can contribute up to $19,500 of your earned income (plus an extra $6,500 if you’re 50 years of age or older).

Health Savings Account

A Health Savings Account (HSA) is like a personal savings account that can only be used for healthcare-related expenses. You must have a High-Deductible Health Plan (HDHP) to qualify for an HSA.

A major draw of HSAs is its tax-free triple threat. You can contribute and withdraw without tax obligations while your earnings grow tax-free. For the 2021 tax year, you can contribute up to $3,600 for yourself or $7,200 for your family.

Even with an HSA and lower monthly premiums, you may not be able to afford the high deductible on your health plan. If you have an emergency or an unexpected cost and not enough in your HSA to cover the balance, you’ll need to pay for those expenses out of pocket.

Taking money out of your HSA for non-healthcare costs is expensive, too. Your withdrawals will be taxed and you’ll have to pay a 20% penalty. If you’re over 65 years of age, only your withdrawals will be taxed, but you won’t face a penalty.


Annuities, sold by insurance companies, is a form of investment that will pay-out to the investor through a series of recurring payments. The investor pays a lump sum of money to the insurer who then invests your money.

For immediate annuities, also known as income annuities, you’ll start receiving money right away. This may be appropriate for those that are close to retirement as there isn’t a lot of time to build your investment. Deferred annuities start payouts later, which gives your money more time to grow. There are no contribution limits to deferred annuities.

Long-term care annuities are a form of deferred annuities, but with a little extra security. This may be a good option for those with pre-existing conditions or other health issues. Those in good health may want to look at alternatives, such as life insurance with a long-term rider. Be mindful that you’ll need to pay a large sum of money to open an annuity regardless of the type of annuity you choose.

Taxable investment account

While IRAs focus on tax-free contributions and withdrawals, taxable investment accounts tax on money earned in a given year.

Unlike IRAs, you can withdraw money from a taxable investment account at any time instead of hitting a certain age (usually 59 and a half). You also aren’t required to take RMDs when you reach the age of 70 and a half, either.

You can open taxable investment accounts through robo-advisors or traditional brokerages. Robo-advisors allow you to be more hands-off with your investments and do most of the leg-work work for you. Online brokers allow you to have more control over your investments.

If you don’t have a lot of cash to start investing, you can look into micro-investing. While some robo-advisors and online brokers have account minimums, micro-investing gives you the chance to invest your spare change.

Another low-cost alternative to a 401(k) is investing in index funds. These are like mutual funds and are “passive” income earners. That means they’re not “actively” managed by a human, which is how most robo-advisors work to keep fees and costs low.

Bottom line

There are a lot of options available for an alternative 401(k) solution. How you decide to invest your money is entirely dependent on how much money you have to invest, the type of investor you are and the options available through your current employer — if you have one.

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