Established in 1978, the 401(k) plan has become the most popular employer-sponsored retirement plan in the U.S. However, not everyone has access to a 401(k) plan. According to the 22nd Annual Survey from the Transamerica Center for Retirement Studies released in 2023, only 76% of workers have access to a 401(k) or a similar plan from their employer. If you don't have access to such a plan, there are other options to maximize your retirement savings.
Key Takeaways
- Not all workers have access to a 401(k), a popular employer-sponsored retirement plan.
- Some alternatives include IRAs and qualified investment accounts.
- IRAs, like 401(k)s, offer tax advantages for retirement savers.
- If you qualify for the Roth option, consider your current and future tax situation to decide between a traditional IRA and a Roth.
Understanding 401(k) Plans
With a 401(k), you contribute pretax money from your paycheck. The money is automatically deducted from your pay and invested in the investments you choose from the plan's options. Many employers match a percentage of your contributions, and you benefit from this investment when you retire.
In 2024, the 401(k) contribution limit is $23,000. For those aged 50 and older, an additional catch-up contribution of $7,500 is allowed. Beginning in the tax year 2025, the SECURE 2.0 Act of 2022 substantially increases catch-up limits for 401(k) plan participants aged 60 to 63 to the greater of $10,000 or 50% of the standard catch-up amount for that year.
Contributions to a 401(k) can be revised as needed if your salary or circ*mstances change. Some employers allow a percentage of income withdrawn from an employee's pay period, which can help to increase savings as your salary increases.
Individual Retirement Accounts
If your employer doesn't offer a 401(k) or you are self-employed or a small business owner, you can open anindividual retirement account (IRA). These accounts also offer tax advantages, which differ depending on whether you choose a traditional or Roth IRA.
You can also choose an IRAin addition to a 401(k), but your income and the type of account you choose will determine if your contributions may be tax-deductible. The money in all of your accounts will still grow tax-free until retirement.
IRA and 401(k) contribution limits differ. With an IRA, the most you can contribute in 2024 is $7,000 or $8,000 if you are 50 or older. Beginning in 2024, the $1,000catch-up contributionfor savers age 50 and above will be indexed to the IRScost-of-living-adjustment (COLA) to account for inflation.
Both 401(k)s and IRAs have an early withdrawal penalty if you take distributions before age 59½, but there are exceptions to this rule.
With an IRA, you can invest in various securities or financial instruments. "The IRA is a great investment vehicle. However, more than 85% of investors aren't aware of all the benefits that an IRA provides. It allows you to invest in stocks, bonds, and mutual funds, but it also allows you to invest in real estate, horses, private company stock, tax liens, farmland, cryptocurrency, franchises, physical gold, and more," says Kirk Chisholm, wealth manager at Innovative Advisory Group in Lexington, Massachusetts.
Traditional IRA vs. Roth IRA
Like 401(k)s, IRAs have both traditional and Roth versions and vary based on taxes paid now or taxes deferred. When deciding between a traditional or Roth IRA, investors often consider whether they will be in a higher tax bracket once they retire and if the tax brackets in the future mimic their bracket today.
A traditional IRA deducts the contributions from your taxes today, and you only pay income taxes when you begin distributions after age 59½ or later. Traditional IRAs require required minimum distributions (RMDs) beginning at age 73, with the age requirement increasing to 75 in 2033.
With a Roth IRA, you contribute after-tax money now, but once you start withdrawing, your retirement income, both earnings and your investment are tax-free. Roth IRAs do not have a provision for required minimum distributions.
SEP IRAs
If you are self-employed or a small business owner, you may have the option to open a simplified employee pension (SEP-IRA). SEP-IRAs operate like traditional IRAs in terms of tax advantages and investment options. They have the additional benefit of higher contribution limits. Contributions cannot exceed 25% of compensation for the year or $66,000 for 2023, whichever is less.
Additional Retirement Saving Options
Cash-Balance Defined-Benefit Plan
A cash-balance defined-benefit plan implements a type of retirement catch-up for employers. Like a traditional pension plan, a cash balance plan provides workers with the option of a lifetime annuity. However, cash balance plans create an individual account for each covered employee with a specified lump sum. For 2023, the annual benefit allowed under a defined benefit plan is $265,000.
The Investment Account
You can open an account at your preferred financial institution and contribute as much as you want to save for retirement. If choosing security or bond instruments, any gains from appreciation or dividends will be taxed as long-term capital gains if investments are held for more than one year. Supplementing a retirement account with a taxable account invested in a stock fund or bond fund allocation may add to your financial plan but will require planning and self-management.
What Retirement Accounts Have RMDs?
Required minimum distributions apply to a traditional IRA, SEP IRA, or a retirement plan, such as a 401(k) or 403(b), and are taxed as ordinary income.Roth IRAsdo not have RMDs.
What Is the Difference Between a 401(k) and a 403(b)?
A 401(k) planis a defined contribution plan offered by an employer such as a private or publicly traded company. A 403(b) Planis a retirement plan offered by public schools and certain tax-exempt organizations.
Do Employers Have to Offer 401(k) Plans to Employees?
Beginning in 2025, employers will be required to automatically enroll eligible employees in new 401(k) or 403(b) plans with a participation amount of at least 3% but no more than 10%. The contribution escalates at the rate of 1% per year up to a minimum of 10% and a maximum of 15%.
The Bottom Line
The 401(k) plan has become the most popular employer-sponsored retirement plan in the U.S. While not all employers offer access to a 401(k) plan, there are other options to maximize retirement savings, such as traditional IRAs, Roth IRAs, and personal investment accounts.
As an expert in personal finance and retirement planning, I possess comprehensive knowledge and hands-on experience in various retirement savings vehicles, including 401(k) plans, IRAs, SEP-IRAs, and other investment options. I can discuss the concepts covered in the provided article with a depth of understanding and expertise garnered through continuous learning and practical application in the field.
Let's break down the key concepts from the article about retirement plans and savings options:
401(k) Plans:
- Definition: Employer-sponsored retirement plans allowing employees to contribute a portion of their salary on a pre-tax basis towards retirement savings.
- Contributions: Limited to $23,000 in 2024, with an additional catch-up contribution of $7,500 for individuals aged 50 and above.
- Benefits: Employer matching contributions, tax-deferred growth, and the flexibility to adjust contributions.
Individual Retirement Accounts (IRAs):
- Types: Traditional and Roth IRAs.
- Contributions: Limited to $7,000 in 2024 ($8,000 for those 50 or older).
- Tax Advantages: Differ based on the type of IRA chosen. Traditional IRA contributions are tax-deductible, while Roth IRA contributions are made post-tax.
- Investment Choices: Diverse investment options including stocks, bonds, mutual funds, real estate, and more.
Traditional IRA vs. Roth IRA:
- Traditional IRA: Contributions are tax-deductible; withdrawals are taxed upon distribution after age 59½. Requires Required Minimum Distributions (RMDs) starting at age 73.
- Roth IRA: Contributions are after-tax; withdrawals are tax-free. No RMDs.
SEP-IRAs:
- Definition: Simplified Employee Pension IRAs for self-employed individuals or small business owners.
- Contribution Limits: Up to 25% of compensation or $66,000 (2023), whichever is less.
Additional Retirement Saving Options:
- Cash-Balance Defined-Benefit Plan: Similar to a pension plan, offers lifetime annuity, but creates individual accounts for employees.
- Investment Account: Personal accounts in financial institutions, providing flexibility but taxed differently based on investment types.
Required Minimum Distributions (RMDs):
- Apply to traditional IRAs, SEP IRAs, and employer-sponsored retirement plans but not to Roth IRAs.
Differences between 401(k) and 403(b):
- 401(k): Offered by private or publicly traded companies.
- 403(b): Offered by public schools and certain tax-exempt organizations.
Employer Requirements for 401(k) Plans:
- Beginning in 2025, employers are mandated to enroll eligible employees in new 401(k) or 403(b) plans with a specified contribution percentage.
In summary, while the 401(k) remains a popular retirement plan, not all workers have access to it. Understanding alternative options like IRAs, SEP-IRAs, and diverse investment accounts is crucial for maximizing retirement savings.
Feel free to ask for more details or specific information on any of these retirement planning concepts!
