Retirement Savings Alternatives to a 401(k)

Retirement Savings Alternatives to a 401(k)



Millions of part-time workers, freelancers, and small business owners don’t have access to a traditional employer-sponsored retirement plan like a 401(k).

However, that doesn’t mean that they are left out when it comes to saving for retirement.

As long as you have earned income, you can open an IRA (individual retirement account) or even an HSA (health savings account).

Even better, depending on your income and filing status, your deductions are often tax-deductible.

Here are three retirement savings alternatives to a traditional 401(k) plan.

1. Traditional IRA

One of the most popular benefits of investing in a 401(k) plan is the ability to make tax-deductible contributions.

For example, let’s say that your AGI (adjusted gross income) is $75,000, and you contribute $5,000 to your 401(k). That means you can deduct $5,000 from your income – lowering your AGI to $70,000.

However, if you don’t have access to an employer-sponsored retirement plan, you can still get a tax deduction by saving for retirement in a traditional IRA as long as your income is under a certain amount, which is set by the IRS (Internal Revenue Service) each year. You can check the current income limits for deducting traditional IRA contributions by visiting the IRS website. 

Just like a 401(k), you won’t owe any taxes on your investments until you withdraw the money from your account.

2. Health Savings Account

Investing in an HSA actually offers you the best of both worlds when it comes to lowering your taxes:

•   Your contributions are tax-deductible

•   Your withdrawals are tax-deductible if the money is spent on eligible health-related expenses.

The money that you put into an HSA can be invested in a wide variety of mutual funds and money market options, just like a 401(k) or IRA. For most people, health care is one of their biggest expenditures during retirement. Therefore, an HSA can be a great way to help pay for medical bills not covered by Medicare or your insurance.

3. Roth IRA

Finally, investing in a Roth IRA offers you a different kind of tax savings than a traditional IRA and 401(k). Instead of your contributions being tax-deductible, your withdrawals are tax-free as long as you meet the eligibility requirements:

•   You are at least 59 and 1/2

•   You have owned your Roth IRA account for at least five years

Furthermore, since your contributions to a Roth IRA are made with after-tax income, you can withdraw them penalty-free and tax-free at any time. Only the earnings on your contributions are subject to early withdrawal taxes and penalties.

Final Thoughts

In short, if you don’t have access to an employer-sponsored retirement account, opening a traditional IRA will offer you the same tax benefits as a 401(k) plan.

A health savings account allows you to make tax-deductible contributions, as well as make tax-free withdrawals as long as the money is spent on eligible health care expenses.

While contributions to a Roth IRA aren’t eligible for a tax deduction, you can make tax-free withdrawals once you meet the eligibility requirements.

Evan Crosby
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