Key Takeaways
- One non-401(k) way to save is through an individual retirement account, which enables the investor to defer paying taxes until funds are withdrawn.
- An alternative way to save is through a health savings account, a type of personal savings account that an individual can establish to pay certain healthcare costs.
- A taxable investment account, which can be opened through a robo-advisor or online broker, is another option to consider if one maxes out their HSA and IRA.
Whether retirement is nigh or decades away, a 401(k) plan is generally a good way to save for that milestone event. But what if one has no such plan (well, start with this calculator to know where you are today)? As it turns out, there are other ways to invest money for the Golden Years that can be just as effective, if not more. With that said, here are 5 ways to save for retirement when one does not have a 401(k).
What is a 401k?
In general, a 401(k) is an employer-sponsored retirement savings plan that is commonly offered as part of an employment benefits package.
With such a plan, employees can save part of their salary, subject to annual contribution caps. Employers frequently match a portion of their employees’ contributions. With a 401(k), the employee chooses how much to contribute and which investments to choose – typically exchange-traded funds or mutual funds.
In all, such investments can grow tax-sheltered, shielding or deferring the account holder from capital gains as well as income taxes, which is primarily why they are so popular.
However, there are other ways to save, most of them tax-advantaged.
1) Individual Retirement Accounts (IRAs)
The first non-401(k) way to save is through an individual retirement account, which enables the investor to defer paying taxes until funds are withdrawn if it is a traditional IRA. It is similar to a 401(k), except that the investor chooses and manages it, rather than their employer.
In addition to the traditional IRA above, a Roth IRA is also an option. A Roth IRA requires the holder to contribute after-tax savings instead of pre-tax savings, as with a traditional IRA. While there will be no current-year tax benefits, one’s earnings and contributions can grow and be withdrawn tax-free. After the account holder turns 59.5 years old and the account has been open for at least five years, the contributions can be withdrawn tax-free and penalty-free.
There are IRA contribution limits, however. For 2024, the annual limit is $7,000. For those who are 50 or older, the limit is $7,500.
2) Health Savings Accounts (HSAs)
The second alternative way to save is through a health savings account, a type of personal savings account an individual can establish to pay certain healthcare costs. It permits the account holder to save and withdraw funds tax-free – if the money is used for qualified medical expenses such as co-payments, deductibles, co-insurance, and more.
- Eligibility requirements. Contribution to an HSA requires enrollment in an HSA-eligible plan, meaning that the plan has at least $1,500 for individual coverage and $3,000 for family coverage. Further, the plan’s out-of-pocket maximum must not exceed $7,500 for individual coverage and $15,000 for family coverage.
- Contribution Limits. Contribution limits for this year are $3,850 if the holder has health insurance just for themselves, or $7,750 if there is family coverage. Overcontributing can result in tax penalties of 6% on the excess deposits.
- Tax advantages. There are multiple such benefits, including tax-deductible deposits, tax-deferred growth, and tax-free spending.
3) Taxable Investment Accounts
These accounts, which can be opened through a robo-advisor or online broker, is another option to consider if one maxes out their HSA and IRA. While such accounts do not provide any tax benefits such as tax-free growth, they can sometimes offer a chance for better returns than a regular savings account. Note that investments with the potential for greater returns also carry higher risks, so one should consider their appetite for such risk as well as their time horizon.
- Flexible contribution amounts. One can invest as much or as little as they like in a taxable account and put that cash into, among other options, stocks, bonds, exchange-traded funds, mutual funds, and real estate investment trusts.
- Diversification. A key benefit to such accounts is that they can diversify one’s investment portfolio, which is an essential component of long-term successful investing.
4) Self-Employed Retirement Plans
The benefits of self-employment are well documented and can include a flexible schedule and the freedom to build one’s career independently. However, being one’s own boss can render it more difficult to save for retirement. Having said that, self-employed individuals do have a number of plan options for retirement savings that the holder can open and contribute to on their own, including:
- Simplified Employee Pension (SEP). This plan offers a simplified way for small business owners and qualified employees to contribute to their retirement savings as well as their own.
- Solo 401(k). Also called a one-participant 401(k), a solo 401(k) provides self-employed individuals with an efficient, tax-friendly way to save for retirement. While there are no income or age restrictions, participants are required to be business owners with no employees except for their spouse.
- SIMPLE IRA. This is a retirement plan for small businesses that have fewer than 100 employees. It permits the business owner and employees to make tax-deferred contributions.
5) Real Estate and Rental Income
The fifth way to save for retirement without a 401k is by investing in real estate and generating rental income. Not only can such investments bring cash flow, but real estate appreciates, has tax advantages, and can help shield against inflation.
The demand for such properties is driven by factors including new demographic trends, population growth, and housing market affordability issues. Such demand is expected to remain steady this year.
Those seeking to start their real estate investing journey might want to consider the alternative investment platform Yieldstreet, which generates investor income streams. To date, more than $3.6 billion has been invested on this platform for private market investing, which offers highly vetted and curated opportunities.
Yieldstreet’s broad variety of alternative asset classes includes real estate, which, since 2000, has outperformed stocks and bonds on an absolute and risk-adjusted basis. In addition to private real estate, Yieldstreet offers a Growth & Income real estate investment trust (REIT), which looks to make equity and debt investments in a range of commercial properties spanning key U.S. markets and property types.
Another significant advantage of adding real estate to one’s investment holdings is that doing so can help diversify one’s portfolio, which can mitigate overall risk.
Alternative investments can be a good way to help accomplish this. Traditional portfolio asset allocation envisages a 60% public stock and 40% fixed income allocation. However, a more balanced 60/20/20 or 50/30/20 split, incorporating alternative assets, may make a portfolio less sensitive to public market short-term swings.
Real estate, private equity, venture capital, digital assets, precious metals and collectibles are among the asset classes deemed “alternative investments.” Broadly speaking, such investments tend to be less connected to public equity, and thus offer potential for diversification. Of course, like traditional investments, it is important to remember that alternatives also entail a degree of risk.
In some cases, this risk can be greater than that of traditional investments.
This is why these asset classes were traditionally accessible only to an exclusive base of wealthy individuals and institutional investors buying in at very high minimums — often between $500,000 and $1 million. These people were considered to be more capable of weathering losses of that magnitude, should the investments underperform.
However, Yieldstreet has opened a number of carefully curated alternative investment strategies to all investors. While the risk is still there, the company offers help in capitalizing on areas such as real estate, legal finance, art finance and structured notes — as well as a wide range of other unique alternative investments.
Learn more about the ways Yieldstreet can help diversify and grow portfolios.
Summary
In terms of preparing for retirement, a 401(k) account remains popular for good reasons: namely tax breaks, relatively high contribution limits, employer tax breaks, and more. However, there are other ways to save for retirement including through investing in real estate, which offers potentially excellent returns, tax advantages, and portfolio diversification.
What's Yieldstreet?
Yieldstreet provides access to alternative investments previously reserved only for institutions and the ultra-wealthy. Our mission is to help millions of people generate $3 billion of income outside the traditional public markets by 2025. We are committed to making financial products more inclusive by creating a modern investment portfolio.
2 Represents an net annualized return, using an internal rate of return (IRR) methodology, with respect to the matured investments shown in your Portfolio experience, utilizing the effective dates and amounts of subscriptions and distributions to and from the investments, net of management fees and all other expenses charged to the investments.[read more]