August 30, 2016

Best Alternatives to 401(k)

Retirement Plans: Best Alternatives to a 401(k)

In most companies, the standard and most common of all retirement plans is the 401(k) Plan. But not every company, especially small companies, freelancers and self employed persons have access or the resources to offer a 401(k) plan.

In fact, statistics show that 31% of the US households do not have access to retirement benefits through employment. Fortunately, there are some really good alternatives to 401(k) retirement plans that have the same or even better tax advantages.

There are four alternative retirement plans that we think are ideal for entrepreneurs, freelancers or employees with no retirement benefits through their employment. For these alternatives to work, the participant must have earned income. So here are the alternatives:

  • Individual Retirement Account (Includes Traditional and Roth IRAs)
  • Simplified Employee Pension Plan (SEP IRA)
  • Self Employed 401(k)
  • Simple IRA

IRA (Individual Retirement Account)

This is the most common of all IRA retirement plans and chances are that you have heard of it in some capacity. An IRA has benefits such as tax breaks compounding. There are two types, namely: Traditional IRA and Roth IRA.

Who is an IRA ideal for?

Anyone with earned income or is the spouse of someone with earned income can open an IRA. This also includes those collecting alimony. The maximum contribution in 2016 is $5,500 and $6,500 for those that are over the age of 50. The contribution limit is adjusted annually to factor in inflation. However, the IRS imposes some limitations on both types of IRA contributions.

How does an IRA work?

A Traditional IRA allows you tax credit in the year of contribution. At higher incomes, benefits start to phase out. Therefore be sure to check out the limits. As a participant, you can withdrawal from your Traditional IRA without any penalties starting at age 59 ½. Any contributions that were not eligible for tax deduction are exempt from this rule. You CANNOT contribute to the traditional IRA after age 70 ½. Also, participants must begin receiving a minimum required distribution from the account at 70 ½.

Since Roth IRAs are funded with after-tax dollars, contributions do not have any tax credit benefits but the earnings from this account are tax free. Distributions start tax free at age 59 ½. You may also withdraw from your Roth IRA account at any time without penalty.

There is no limit on how long you can contribute to a Roth IRA as long as you have earned income. Roth IRA retirement plans do not have the mandatory age driven distributions requirements like many other retirement accounts.

As a Roth IRAs participant you can benefit tremendously from the tax free earnings. If you start off at age 25 you can  have more than $700,000 by age 65. This is assuming an annual rate of return of only about 5%.

Important notes about IRAs

The deadline for contributing for the 2016 tax year is April 17th, 2017. You are allowed approximately 15 1/2 months to deposit your yearly contributions into your IRA retirement plan. Deadlines are not negotiable and tax extensions do not apply to your IRA contribution deadlines.

Anyone withdrawing early is subject to a 10% penalty, but there are some situations where a waiver will be granted. Read more on these exceptions at

SEP IRA Retirement Plan

If you are a freelancer or you are self-employed you're eligible to open in SEP IRA. This is also called Simplified Employee Pension plan. SEP IRA retirement plans provide tax benefits for those who have small businesses or earn their income through freelancing.

Who is a SEP IRA ideal for?

SEP IRA plans are best for small business employers, one-man-show businesses, freelancers and employees with side gigs. Therefore, C-corporations, S corporations, partnerships and sole proprietors are eligible to open a SEP IRA.

How does a SEP IRA work?

SEP IRA retirement plans are classified in the same category as traditional IRAs. Therefore tax deductions apply to contributions. Nevertheless, the big difference is that the SEP IRA has a significantly higher contribution limit. Your contribution limit is based on your income. The limit for 2016 is 25% of your pre-tax income (20% if self-employed) or $53,000, whichever is the lower.

As an employer, you can set up accounts for eligible employees but you MUST contribute to the employees' the same amount that you contribute to your own account. Employees are NOT eligible to make contributions to their SEP IRA retirement plans; only the employer may contribute.

Your employer funded SEP IRA, even though classified as a Traditional IRA, does not impact your eligibility to contribute to a Traditional IRA or Roth IRA. Therefore you can open a Traditional or Roth IRA account.

SEP IRA retirement plans are very easy to set up and maintain. There are no required annual filings and the contribution limits are quite high ($53,000 in 2016), hence making it a very attractive alternative retirement plan to a 401(k).

Important notes about SEP IRAs

This retirement plan does not provide for employee deferrals NOR catch up contributions. On the other hand employers may contribute up to $53,000 or 25% of employee wages, which is pretty generous.

The tax deadline is also the deadline for setting up an account. April 17th, 2017 will be the 2016 deadline. You can get a contribution extension by filing for a tax return extension. Therefore the deadline will be the same for both.

Self-employed 401(k) Retirement Plan

This type of 401(k) is the equivalent of the regular 401(k) offered through the employer but specifically for the self employed individuals with NO employees. This type of 401(k) is also called a solo 401K.

Who is a Solo 401(k) ideal for?

A Solo 401(k) is strictly for the self employed. It has generous high contribution limits of $53,000 on the employer part plus $18,000 ($24,000 if age 50 or older) on the employee side.

How does a Solo 401(k) work?

This plan provides the self employed participant two opportunities to contribute: One as an employee and second as the employer.

As an employee, just like with an IRA, you can contribute up to 100% of your total income up to $18,000 for the 2016 year. If 50 or older you are eligible to make catch up contributions of up to $6,000 (for 2016) for a total of up to $24,000.

As an employer you can contribute up to 25% of your total earned income. Nevertheless, it is very important to note is that you must first deduct half of your self-employment tax and any contributions that you have made as an employee (in the preceding paragraph).

Important notes about Solo 401(k) plans

If your total contribution (plan assets) reaches $250,000, you must file an IRS Form 5500. The end of the fiscal year generally is the deadline, therefore, for 2016 the last day to contribute is December 30th which is the last business day of the year.

Simple IRA Retirement Plan

A Simple IRA is another retirement plan that allows small businesses (under 100 employees) and the self employed. It encourages employers to participate and consequently encourage their employees to save for retirement. Just like a 401(k), this plan offers pre-tax contributions and employer match to the employee contribution.

Who is a Simple IRA ideal for?

This type of account is for small businesses with less than 100 employees and self-employed individuals.

How does a Simple IRA work?

  • In 2016 an employee may contribute 100% of salary for a total up to $12,500.
  • If you are an employer you may match the employees' contributions up to 3% or 2% non-elective contribution.
  • Catch up contributions ($6,000 for 2016) are allowed for those age 50 and over

You should be aware that even if a business does not make a profit, contributions to the Simple IRA plan may be enforced.

Important notes about Simple IRA plans

October 1st is the deadline to set up this type of retirement plan. Contribution deadline is the business’s tax filing deadline – including extension.

Conclusion: Select your plan and start saving for retirement today.

Saving for retirement is very easy, and especially because there are plenty of alternatives to 401(k). All it takes is the willingness to give it a try. With all these options your employees are bound to reward your company with loyalty and service.

Once you've determined which retirement plan works best for you or your employees, it is important to start saving immediately. Start while you are younger so that you have plenty of time to accumulate savings. Contact us to help you select and set up your company’s retirement plans.

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Felix Mwania

I live in the intersection of technology and entrepreneurship. I am a technology enthusiast but my passion is helping small businesses succeed, including mine.

When I am not working, you will find me goofing with my wife and kids. When not with family and/or friends, you will find me doing some home improvement projects.

Felix Mwania


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