Traditional retirement plans like 401k plans and Social Security have been the go-to options for decades. However, many people are now exploring alternative retirement plans. The future seems uncertain with the rising cost of living and inflation.
Alternative retirement plans can provide more control and diversity.
You can explore different investment opportunities that better suit your financial goals. This guide will explain these alternatives and why they could be a better fit.
FICA Social Security Alternative Retirement Plan
Some states and local governments offer employees a FICA Social Security Alternative Retirement Plan instead of Social Security. These plans help employees save for retirement without paying into Social Security. Key features include:
- No Social Security taxes (FICA) are taken from your paycheck. Instead, contributions go to a personal retirement plan.
- Higher take-home pay since you avoid the 6.2% FICA tax.
- Contributions are pre-tax, and you may be allowed to contribute more than 7.5% of your pay.
- Investment flexibility means you can invest in different funds. This gives you more control over your retirement savings.
- Employees contribute to an individual account.
- Fully vested funds mean you can take contributions when you change jobs.
Who is this Social Security Alternative Retirement Plan for?
With this plan, you build retirement savings without relying on Social Security. The FICA Alternative Retirement Plan for certain employees, particularly:
- part-time workers
- seasonal workers
- temporary workers
These are workers who might not take part in traditional Social Security.
These states have widely adopted these Social Security Alternative Retirement Plans within their public universities, local governments, and some agencies:
- Texas
- California
- Nevada
- Florida
Alternative Investments in Retirement Plans
Traditional investments like stocks and bonds are common in most retirement plans. Alternative investments diversify savings and reduce exposure to market fluctuations.
These investments offer unique ways to grow your wealth. They protect you against risks that may impact more conventional assets. Working with a financial planner for retirement will help you determine which options suit you.
Here are some of the top alternative investments in retirement plans:
Real Estate
Real estate as an alternative retirement plan allows you to earn income and build long-term value:
- Steady income: Rental properties generate regular income.
- Appreciation: Real estate often increases in value over time.
- Tangible asset: Property is a physical asset that offers a sense of security.
- Tax benefits: You can claim deductions for mortgage interest and property taxes.
Precious Metals
Investing in gold, silver, and other metals can protect against economic downturns.
- Inflation hedge: Precious metals often hold or increase value during inflation.
- Safe haven: In times of economic crisis, metals tend to perform better than stocks and other asset classes.
- Diversification: Adds a layer of security to your retirement portfolio.
Private Equity
Private equity allows you to invest in businesses that are not publicly traded.
- Higher potential returns: These investments can yield significant profits if the company grows.
- Access to early-stage companies: You can invest in startups and growing businesses before they go public.
- Diversification: Investing in private companies spreads risk across different asset types.
What Are Some 401k Retirement Plan Alternatives?
Many people rely on 401k plans for retirement savings, but these plans have limitations. Exploring 401k retirement plan alternatives is beneficial:
- If you’re self-employed or run a small business without employees. Solo 401(k)s, SEP IRAs, or Simple IRAs offer high contribution limits and flexibility.
- If you want more diverse choices for retirement savings.
- If you’re a high-income individual and may need more tax-advantaged options.
- If you prefer a predictable, steady income rather than relying on market fluctuations.
- If you aren’t eligible for employer-sponsored 401k because you’re a part-time, seasonal, or temporary worker.
- If you’re concerned about high fees. Management and administration fees can eat into your returns. Some 401k retirement plan alternatives have lower fees.
- If you want more control over when and how they pay taxes on their retirement savings.
- If you’re going to retire early.
1. Roth IRA (Individual Retirement Account)
These are some features:
- Tax-free withdrawals in retirement.
- No required minimum distributions (RMDs) during your lifetime.
- More investment flexibility than many employer-sponsored 401(k)s.
- Lower contribution limits compared to 401ks.
- No immediate tax deduction for contributions, which may impact short-term tax savings.
2. Traditional IRA (Individual Retirement Account)
These are some features:
- Contributions may be tax-deductible, depending on your income and whether you have access to a workplace plan.
- Investment choices are broad and include stocks, bonds, and mutual funds.
- Tax-deferred growth means your investments grow without being taxed until you withdraw.
- More control over investment options compared to a 401(k).
- It can be combined with a 401(k) for higher total retirement contributions.
- Withdrawals are taxed as ordinary income.
- Required minimum distributions (RMDs) must start at age 73.
- Lower contribution limits than a 401(k).
3. SEP IRA (Simplified Employee Pension)
These are some features:
- Primarily for self-employed individuals or small business owners.
- Contributions are tax-deductible, and investments grow tax-deferred
- High contribution limits make it ideal for business owners looking to save more.
- Simple setup and low administrative costs compared to other retirement plans.
- Tax advantages with immediate deductions.
- The employer must contribute the same percentage of salary for each eligible employee, which can become expensive if the business has multiple employees
- Like a traditional IRA, withdrawals are taxed.
4. Solo 401k
These are some features:
- Suitable for self-employed individuals or small business owners with no employees.
- High contribution limits are for both employee and employer contributions.
- Options for both pre-tax and Roth contributions.
- Flexibility to choose Roth or traditional tax treatment.
- If needed, borrow up to 50% of the account balance (max $50,000).
- Requires annual IRS reporting once the plan has over $250,000 in assets.
5. Annuities
These are some features:
- Can be set up as immediate or deferred annuities.
- Guaranteed income for life or a specified period.
- Can offer peace of mind with fixed income, especially in uncertain markets.
- Options for tax-deferred growth in the case of deferred annuities.
- Often, it comes with high penalty fees and surrender charges if you withdraw early.
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A Roth conversion may not be suitable for your situation. The primary goal in converting retirement assets into a Roth IRA is to reduce the future tax liability on the distributions you take in retirement, or on the distributions of your beneficiaries. The information provided is to help you determine whether or not a Roth IRA conversion may be appropriate for your particular circumstances. Please review your retirement savings, tax, and legacy planning strategies with your legal/tax advisor to be sure a Roth IRA conversion fits into your planning strategies.
Any comments regarding safe and secure investments and guaranteed income streams refer only to fixed insurance products. They do not refer in any way to securities or investment advisory products. Fixed insurance and annuity product guarantees are subject to the claims paying ability of the issuing company; not guaranteed by any bank or the FDIC.
Stewart Willis is the founder and president of Asset Preservation Wealth & Tax, a financial planning firm in Phoenix, Arizona. Investment advisory services offered through Foundations Investment Advisors, LLC, an SEC registered investment adviser.
The commentary on this blog reflects the personal opinions, viewpoints and analyses of the author, Stewart Willis, providing such comments, and should not be regarded as a description of advisory services provided by Foundations Investment Advisors, LLC (“Foundations”), an SEC registered investment adviser or performance returns of any Foundations client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment, legal or tax advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Personal investment advice can only be rendered after the engagement of Foundations for services, execution of required documentation, including receipt of required disclosures. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Foundations manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Any statistical data or information obtained from or prepared by third party sources that Foundations deems reliable but in no way does Foundations guarantee the accuracy or completeness. Investments in securities involve the risk of loss. Any past performance is no guarantee of future results. Advisory services are only offered to clients or prospective clients where Foundations and its advisors are properly licensed or exempted. For more information, please go to https://adviserinfo.sec.gov and search by our firm name or by our CRD # 175083.
