5 Best 401K Alternatives: Your 401(k) Isn’t the Only Way to Save For Retirement

A&I Wealth Management > Blog > 5 Best 401K Alternatives: Your 401(k) Isn’t the Only Way to Save For Retirement

Whether you’re just getting started saving for retirement or have decades of investing under your belt, it’s a good idea to know what other investment options are available. While your 401(k) plan may offer dozens of mutual funds from which to choose, the truth is that most Americans have little choice but to settle on a small handful of these funds.

When it comes to investing for your golden years, you deserve better options.

Do You Know – The “Devil Is In The Details”

Some mutual fund expenses are lower than others due to the funds being actively managed or being index funds. This is not uncommon with large brokerage companies offering their own mutual funds for sale through an employer sponsored retirement plan. If you’re looking closely at your 401(k) plan’s investment options, you may see that there are some higher-priced funds that have a seemingly equivalent lower-cost option available. It may be fine for some people, others feel more comfortable knowing they have options beyond what their employer is offering–options that allow them to take control of their retirement investments. This is particularly important if you are self-employed or simply want the ability to find better investment alternatives outside your employer’s plan.

Here are some of the best retirement investing alternatives to a 401(k).

1. An IRA (Traditional or Roth)

If you work for someone else, the easiest way to begin building retirement wealth is through an Individual Retirement Account (IRA). These accounts are generally tax-deferred; that is, your contributions may be deductible based on your adjusted gross income. Earnings grow on a tax-deferred basis until distributions start in retirement. You make contributions to an IRA with post-tax dollars, but all future growth inside the account is free from taxation–both federal and state–as long as certain requirements are met. The main requirement: By April 15 of the year following the year you turn age 72, you must start taking minimum annual distributions from your IRA.

There are two types of IRAs you can contribute to: Traditional or Roth. With a Traditional IRA, your contributions are deductible, but withdrawals in retirement are taxed at ordinary income tax rates. If you make an early withdrawal prior to age 59 1/2, the distribution will be subject to an additional 10% pentaly tax. Contributions to the Roth IRA are made with after-tax dollars–you don’t get a tax deduction when you put money into one–but qualified withdrawals in retirement are 100% tax free (though, there is an exception for some early withdrawals).

Long story short: A Roth IRA will likely save you more on taxes in retirement than a Traditional IRA but a Roth IRA will cost you more now while working. If possible, try to contribute enough each year to maximize your Roth contribution limit ($6,000 per person for 2021 if you are under age 50; $7,000 per person for if you are age 50 or older). Roth contributions are subject to income limits.

2. A Solo 401(k)

While a Traditional or Roth IRA is available to anyone with earned income, there’s another special retirement investing vehicle that may be beneficial to the self-employed: the Solo 401(k), which is an Individual 401(k). The main benefit of this plan over an IRA (Traditional or Roth) is its higher contribution limit–employees can contribute up to $19,500 annually in 2021 or $25,000 if you are age 50 or older. Self-employed individuals can make contributions of up to $58,000 per year. As with all retirement plans, earnings inside a solo 401(k) grow tax deferred and distributions in retirement are taxed at ordinary income rates (though there is some wiggle room for early withdrawals). 

You may want to contribute to a Roth Solo 401(k). Similar to the Roth IRA, your contributions of up to $19,500 or $25,000 if you are age 50 or over are after-tax. Roth 401(k) withdrawals are tax-free as long as you meet the minimum holding period of five years and you are at least age 59 ½ when you make the withdrawals.


If you are a small business owner, you can set up a SEP IRA. The key difference between a SEP IRA and other IRAs is that contributions are “uniform.” This means you must contribute on behalf of your employees if you make a contribution for yourself and/or your relatives. Otherwise, you face tax penalties for not doing so. SEP IRA contributions to this type of plan are capped by the lower of $58,000 per year, or 25% of an employee’s pay. As you might have guessed, SEP IRA earnings grow tax-deferred.

4. A health savings account (HSA)

A health savings account is a tax-exempt trust or custodial account created exclusively to pay or reimburse qualified medical expenses of the account owner, his spouse, and eligible dependents. If you are enrolled in a high deductible health plan (HDHP), you can set up an HSA with either your insurance company or bank–and anyone can make contributions to the plan on your behalf. In 2021, the maximum individual contribution to an HSA is $3,600 and the maximum family contribution to an HSA is $7,200. Contributions are pre-tax, the investments grow tax-deferred and distributions are tax-free as long as they are used to pay for medical expenses.

5. Real estate, including REITs, Limited Partnerships and Direct Real Estate investments

Real estate provides some of the most generous tax benefits among all investments. 

Passive investors in direct real estate often get tax-advantaged benefits. First, they receive distributions on which they must pay personal income taxes. But, they can reduce the income by depreciation of their properties on an annual basis for accounting purposes–even if no cash actually changes hands.  

Real estate investment trusts are companies that invest in real estate or mortgages. REITs are one simple way to diversify your investments in real estate. However, the REIT does not get all of the tax benefits that a direct ownership in real estate provides. REIT earnings are generally not taxed at the corporate level. Instead, distributions to investors are taxed as ordinary income tax rates rather than capital gains tax rates. 

Some real estate investments are formed as limited partnerships. They are commonly confused with a REIT, but they are different. A limited partnership pays a K-1 tax return, which adds an additional cost and complexity when you are filing your taxes. 

To avoid these pitfalls, you can hold your REIT shares in a tax-advantaged account like an IRA or 401(k). Real Estate investments may involve specific risks that are greater than those associated with traditional investments. Regarding REITs, investors should consider the special risks including limited liquidity, tax considerations, increased expenses, potentially speculative investment strategies, such as leveraged ratio and commodity price volatility.  There is no guarantee that the investment objective of the REIT will be met.  Important information regarding the REIT can be found in the prospectus and should be read and carefully considered before investing.


If you do use a Traditional IRA to invest, you’ll need to consider WHEN you take withdrawals from your account. The IRS requires that your annual withdrawals start after age 72.


Investment advisory services offered through A & I Financial Services LLC, registered investment advisor. Securities provided through Geneos Wealth Management Inc., member FINRA, SIPC.