If your employer doesn't offer a 401(k), or if you are self-employed, here are five alternative plans your employer may offer or you must enroll in independently:
Rule of thumb: These plans are only tax advantage "buckets" that hold your money. You must actually take one more step and invest the money by choosing which stocks, mutual funds, annuities, ect. to invest in for your money to actually grow!
Your employer might offer a 403(b) plan if you work in a public school or non-profit organization. Similar to the 401(k), your plan may include options for a Traditional 403(b) or Roth 403(b).
Here is a comparison between the 403(b) and 401(k) plans:
403(b) | 401(k) | |
Employee Contributions | Contributions can be taken pre-tax (Traditional) or post-tax (Roth) | Same |
Employer Contributions | Employers may offer a match | Same |
Investment Options | Mutual Funds and Annuities | Stocks, bonds, and mutual funds |
Taxes | Traditional: Tax-Deferred Roth: Tax-Free Growth | Same |
Withdrawals |
| Same |
Required Minimum Distributions (RMDs) | RMDs are required starting at the age of 72 (or 70½ if an individual turned 70½ before January 1) | Same |
Contribution Limits | Annual limit 2024: $23k | Same |
This plan is for a solo business owner without any employees:
The plan participant is both the employee and employer, which can be really beneficial as the business owner.
Contributions
As the "employee" you are allowed up to $23,000 or 100% of compensation (whichever is less)
As the "employer" you can make a profit-sharing contribution up to 25% of your "employee" compensation from the business.
The best part with this type of account is that the contributions you make to yourself as the "employer" are tax-deductible to your business (subject to IRS maximums)
If your employer does not offer any type of retirement plans, then you can open your own Individual Retirement Accounts (IRAs). There are multiple types of IRAs, but the two most common are the Traditional and Roth IRAs. They are similar to the Traditional and Roth 401(k)/403(b) but one big difference is an IRA must be opened and managed by the individual and not an employer.
Traditional IRA | Roth IRA | |
Individual Contributions |
|
|
Investment Options | Stocks, bonds, and mutual funds | Same |
Taxes | Tax-deferred growth (the money you contribute is deducted from your taxable income now, but the money you withdraw later will be taxed) | Tax-free growth (the money you contribute has already been taxed, so money you withdraw later will be tax-free, including any interest and growth) |
Withdrawals |
| Same |
Required Minimum Distributions (RMDs) | RMDs are required starting at the age of 72 (or 70½ if an individual turned 70½ before January 1) | Roth IRAs are not subject to RMDs during the lifetime of the original account holder. |
Contribution Limits | 2024: $7,000 | Same *Income limit: Must have a modified adjusted gross income (MAGI) of $161,000 or less to contribute directly to a Roth IRA. Otherwise you can contribute via the Backdoor Roth method. |
SIMPLE IRAs are generally used by small businesses with less than 100 employees. This is a retirement plan where employees and the employer can contribute to a Traditional IRA.
The 2024 contribution limit for SIMPLE IRAs is $16,000, with an additional $3,500 catch-up contribution for those 50 or older.
Contributions
The employer is required to contribute each year either a:
Matching contribution up to 3% of compensation or
Example: Employee much contribute to this plan to qualify for the match
2% non-elective contribution for each eligible employee
Example: Employee does not contribute to this plan, but the employer will contribute 2% of the employees compensation to the IRA
SEP IRAs are offered to employees who work for small businesses, sole proprietors, and independent contractors. In this plan, employees do not contribute, rather the SEP IRA is created and contributed only by the employer.
Contribution percentages are set by the employer and must be the same percentage for every eligible employee
Even though your employer made the contributions, you, as the employee, are responsible for investing the contributions made
Contributions and earnings are not taxed until withdrawn
The SEP IRA has the same withdrawal rules as other IRA plans above
Disclaimer: This is for financial education only, not financial advice. Please continue conducting your own research on these subjects to thoroughly understand which tax-advantaged accounts align best with your financial situation.
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