401K is a contribution plan that was enacted in 1978 in a bid to allow employees to make a pre-tax contribution to the 401k account or plan. The plan works in such a way that funds are automatically deducted before payday. In simple terms, the contributions are made before the said employee receives his/her paycheck.
The good thing about the 401K plan is that any venture, regardless of its nature, can be able to adopt the plan. Also, it gives employers the power to restrict individuals that they feel are not qualified for the plan. Employees who are aged over 50 also have a package that allows them to make catch-up contributions. Remember that the plan is not compulsory for employers.
The list of the benefits is endless. However, there are some employers that may not be able to offer the 401K plan. Nevertheless, all is not lost, the following are the best alternatives to 401k.
1. SEP IRAs
SEP IRA stands for Simplified Employee Pension Individual Retirement Account and is one of the best alternatives to 401K. This is especially if you are a freelancer. SEP IRA works with the same guidelines that a Traditional IRA works with: you will get tax benefits such as tax credits now as opposed to later.
SEP IRAs could be the best pick as they have no restrictions on what type of business wants to establish the plan.
2. Index funds
What are index funds? These are investment funds that are founded on an index of stock such as the Dow Jones. Note that if you invest in an index fund, your investment will solely be based on the performance of the particular index. This is for the reason that by investing in an index fund, you are buying and holding the securities of that specific platform.
The goodness with this is that you will be investing in a portion of every asset as opposed to the entire stock.
3. Traditional and Roth IRAs
Traditional IRAs work quite different from Roth IRAs. With the traditional ones, the contribution to the account is tax-deductible. Whereas, for Roth IRA the contribution is not tax deductible. You should, however, note that there exist eligibility requirements for Roth IRAs, you should, therefore, get a deep insight into the plan before establishing it. The advantage is that your income after retirement is tax-free.
Working with both IRA plans is advisable as you will be able to reap the tax benefits both now and later.
4. Taxable brokerage account
The benefit that this alternative has over 401K is that it gives you flexibility. It is winning because taxable brokerage accounts give you the freedom to choose what you want to buy and allows you to sell it any time you want to. Although you will have to pay taxes on any gains you get from the investment, there are no penalties imposed on early withdrawals.