No 401(k) Match? 3 Alternate Ways to Save for Retirement

April 28, 2021

People generally love 401(k) accounts because they offer an easy way to automate your savings, and provide tax-deferred contributions, efficient growth, and employer matches.

Those are all great features, but what if your employer doesn't provide a company match? Or, what if it does, but you are contributing more than the share of your salary that entitles you to your maximum match?

If either of those scenarios applies to you, your company 401(k) might not be the best place to stash all of your retirement savings. As such, it might be smart to consider these three alternatives vehicles, which could prove effective and lucrative for you.

1. Traditional IRA

A Traditional IRA bears many similarities to a 401(k). Your contributions to it are tax-deferred -- put simply, the money you put into one does not count toward your taxable income that year. This is one reason why many accountants recommend Traditional IRAs to their clients.

Moreover, your gains are tax-deferred as well. Any returns on the assets in a Traditional IRA from price appreciation, dividends, or interest won't be subject to taxation while the funds remain in the account.

However, those taxes are only deferred -- not entirely avoided. The federal government will eventually get its cut. When you take withdrawals from your Traditional IRA -- you can do so without penalty at any time after you turn 59 1/2 -- those withdrawals will be taxed as ordinary income. This is still beneficial in many cases, but that tax liability can discourage retirees from spending those assets.

The Traditional IRA differs from a 401(k) in several important ways. First, employees can only get access to a 401(k) account from their employer, whereas an IRS can be opened by any person who meets the qualifications.

Also, if you want a tax-advantaged retirement account that comes with matching funds, you're stuck with the 401(k) or similar plan that your employer offers -- if it offers one. As such, you are subject to the fees, terms, and investment options of that plan. Those options are often limited, and the fees can be widely variable.

(If you're self-employed, the Solo 401(k) is out there, and given that you're the boss, you can make the choices about what to invest in. But you still won't be getting those extra matching funds.)

In contrast, the specific terms of an IRA will depend on the brokerage firm where you open the account -- but IRAs generally offer wider ranges of investment options, including individual stocks.

IRAs also have much lower contribution limitations than 401(k)s. Individuals under 50 years old can contribute up to $6,000 to an IRA each year; those over 50 may contribute up to $7,000. The annual cap for 401(k) contributions is $19,500 per year, or up to $26,000 if you are over 50.

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2. Roth IRA

Roth IRAs are popular among young people and growth investors. Unlike contributions to either 401(k)s or Traditional IRAs, Roth contributions are not tax-deductible. You will have to use after-tax money to invest in a Roth and potentially give up a deduction you would've gotten from a Traditional IRA contribution.

However, these accounts provide tax-free growth and distribution. Qualifying withdrawals made after you turn 59 1/2 are tax-free. Roth assets, therefore, avoid capital gains taxes -- and those tax bills can be large if your investments have appreciated significantly over the years. Think about the compounding returns that can be achieved by high-growth stocks or ETFs over several decades. It can be a great advantage to have to pay income tax today but avoid capital gains tax on a much larger sum down the road.

Roths have similar contribution limits to Traditional IRAs, but they also come with restrictions based on income. The ceiling on Roth IRA contributions declines on a phased basis for individuals earning between $125,000 and $140,000 annually, and from $198,000 to $208,000 for married couples. If your earnings exceed those ranges, you cannot contribute to a Roth. That's one reason why these are attractive tools for younger professionals, who are in relatively low marginal tax brackets and have not yet reached their peak earning potential.

3. Brokerage account

Regular brokerage accounts don't offer any sort of special benefits or tax advantages for retirement savers, but there's nothing stopping you from earmarking the investments in one for long-term purposes. And they certainly have some attractive features.

Unlike 401(k)s or IRAs, there are no regulatory restrictions about when and how you can withdraw funds from brokerage accounts. You are free to liquidate any contributions or gains at any age, and you won't be subject to penalties for doing so. Even if you don't intend to access those funds prior to retirement, they're still available should you need them for an emergency or to take advantage of an opportunity along the way.

Brokerage accounts are also useful for tax diversification in retirement. If all of your retirement funds are housed in a 401(k), then every dollar you spend during your golden years will be subject to ordinary income tax rates. Most people occupy lower tax brackets in retirement than they did when they were working, so this usually isn't as much of a downside for them. However, we have no idea what the federal tax rates will be several decades from now. If rates wind up rising significantly, then it might be better to have incurred taxes on your income when you earned it. Withdrawals from brokerage accounts are only subject to capital gains tax on the appreciated portion, so having both types of accounts can provide you with options for sourcing cash in the future.