Many companies, especially newer businesses, do not offer a company 401(k) plan for employees. But, that isn’t a reason for slacking when it comes to saving and investing for the future.
An employer-sponsored 401(k) plan is the most common retirement plan for American workers. Personal finance experts consider it one of the essential steps to saving because employers tend to match a portion of the employee’s contribution. When workers hear of this “free money”, there is an incentive to save.
Unfortunately, not everyone is offered this plan at their workplace. The absence of a company 401(k) should not be a reason to put off saving and investing. There are a plethora of other options to stay on track when it comes to financial goals.
1. Individual Retirement Accounts (IRAs)
Whether is a traditional IRA or a Roth IRA, either one will offer tax advantages. For the year 2011, taxpayers can contribute as much as $5,000 ($6,000 for age 50 and over). Compared to 401(k) plans, IRAs usually offer many more investment options including stocks, mutual funds IRAs, ETFs, bonds, CDs and much more.
Traditional IRA contributions are tax deductible with the hopes that tax rates decrease in the future. Distributions are taxed when you choose to withdraw from the traditional IRA. Roth IRA contributions, on the other hand, are made with post-tax dollars with the expectation that tax rates are higher upon retirement. When you begin pulling money from a Roth IRA in retirement, the money comes tax-free.
2. Regular Savings
Ruling out a regular savings account is common because it doesn’t offer high returns on your cash, especially during periods of low interest rates. However, putting money in a low-risk deposit account, such as a savings account, money market account, or CD, offers financial security. Experts advise on a sizable emergency fund that is accessible for short-term unplanned expenses.
Critics feel that putting funds in savings accounts in excess of backup funds is nonsense because interest rates cannot catch up with inflation. If you insist on a conservative approach to saving for the future, don’t mind the noise and continue building a nest egg through low-risk savings – as long as you don’t spend it before you need it.
3. Coverdell ESA and 529 Plans
If you have children, consider tax-deferred accounts such as Coverdell ESAs and 529 plans that allow you to save for their education.
A Coverdell Education Savings Account has the properties of a Roth IRA but distributions are tax-free only for qualifying education expense from kindergarten to the end of college. You can contribute a maximum of $2,000 per child and there are many investment options.
A 529 plan also doesn’t offer federal tax-deductible contributions but some states offer income tax deductions. Investments in a 529 plan is limited by the program. Withdrawals are tax-free for qualifying college expenses.
4. Taxable Brokerage Account
A taxable brokerage account is considered a costly investing vehicle because of fees and taxes. Regardless, a brokerage account is utilized by determined savers and investors to grow their money. There are a wide range of investments available from low-risk bonds to high-risk individual stocks. Nowadays, online discount brokerages, low-cost ETFs, and tax-exempt funds offer many ways to keep costs low. Depending on the investment allocation, a taxable brokerage account can yield high returns.
Simon Zhen is a research analyst for MyBankTracker. He is an expert on consumer banking products, bank innovations, and financial technology.
Simon has contributed and/or been quoted in major publications and outlets including Consumer Reports, American Banker, Yahoo Finance, U.S. News – World Report, The Huffington Post, Business Insider, Lifehacker, and AOL.com.