While you may be concerned about reports that fewer than half of all U.S. employees with access to a 401(k) take advantage of this pre-tax savings option, in many cases, the 401(k) investments and match offerings aren't appealing enough to spur you to invest. If you don't want to be stuck paying high fees for unsatisfactory mutual funds, do you have any other options when it comes to investing for your retirement? Read on to learn more about some of your alternatives if you're not happy with your employer's current retirement savings options:
Individual Retirement Account (IRA) or Roth IRA
Even employees who have access to an employer-sponsored 401(k) can invest separately in an individual retirement account or Roth IRA. These accounts generally have lower limits than the 401(k) limit, but the traditional IRA offers you the same level of pre-tax savings, lowering your adjusted gross income and therefore your effective tax rate. Withdrawals from an IRA (both contributions and gains) will be taxed at your marginal rate, and withdrawals before age 59.5 will also be assessed a 10% penalty by the IRS.
A Roth IRA is funded with money that has already been taxed; in exchange, any gains or dividends generated by this account won't be taxed upon withdrawal. If you're at a fairly low tax rate now but anticipate a higher income in retirement, a Roth IRA may be the best way to help you diversify your retirement assets and provide yourself with a stream of tax-free income later.
Health Savings Account (HSA)
Although not strictly a retirement account, an HSA can help improve your retirement picture by allowing you to set aside funds for your future medical care. Because withdrawals from an HSA don't necessarily need to be made in the year (or even decade) in which a medical expense was incurred, you can also opt to pay your medical costs out of pocket and then reimburse yourself with HSA funds during retirement, keeping them invested in the interim. Like a Roth IRA, HSA gains and earnings are tax-free (as long as they're used for a legitimate medical expense).
In some cases, you may be able to persuade your employer to move away from the limited 401(k) offerings and instead offer a "Simple" (Savings Incentive Match Plan for Employees) IRA. This plan has a streamlined approach to retirement that can allow your employer to match funds contributed without going through all the bureaucracy and paperwork often required of 401(k) plans. A Simple IRA may be the best option for a small business, as the ease of administration can reduce the paperwork burden for business owners while the matching setup can allow owners to more personally reward employees for a job well done.
Contact local financial services for more information and assistance.