For those without employer-backed 401(k) retirement plans, alternative solutions such as traditional individual retirement accounts (IRAs), Roth IRAs, and health savings accounts are available. These options, despite having lower annual contribution limits, provide valuable tax benefits which can enhance overall returns.
Traditional IRAs feature tax-deductible contributions, thus lowering current-year tax liabilities. However, upon retirement, withdrawals become tax liabilities. Roth IRAs offer tax-free withdrawals as contributions are made after-tax. Health savings accounts (HSAs) present tax advantages, with tax-deductible contributions, tax-free growth, and tax-exempt withdrawals for qualified medical costs. These options, while potentially complex, can represent significant retirement savings for those without employer-backed plans.
Offered by banks and brokerage firms, Traditional IRAs allow tax-deductible investments to anyone, regardless of income. For those under 50, the maximum annual contribution is $7,000 (as of 2024), with an additional $1,000 for those 50 and above. This form of IRA also offers tax-deferred growth, meaning returns aren’t taxed immediately. Furthermore, the individuals may qualify for a tax deduction on their IRA contributions.
Understanding alternatives for 401(k)-less retirement
However, withdrawals typically need to wait until the age of 59½ to avoid penalties, with mandatory distributions commencing at 72.
In contrast, Roth IRAs tax contributions upfront, hence providing tax-free withdrawals later in life. It carries the same contribution limits as Traditional IRAs, but without any mandatory distribution requirement. The downside is their income constraints where high earners may not be able to make full or any contributions at all. Withdrawals before 59½ can also incur penalties and income tax.
Lacking an employer-based 401(k) shouldn’t discourage retirement planning. Alternatives like traditional or Roth IRAs might provide equal or superior benefits. Other investment options include index funds, mutual funds, real estate and individual stocks or bonds. Some people may also consider annuities or real estate investment trusts (REITs). Each carries its own benefits and risks, hence thorough research and consultation with a financial advisor is recommended. Remember, it’s never too early or late to start saving for retirement.
