Saving for retirement has always been an unwavering cornerstone for most American families. For the longest time, employer-backed 401Ks formed the backbone of that process. However, recent data suggest that younger Americans - and their companies - are moving away from this savings instrument.
This begs the question - “If modern companies are moving away from 401Ks, how do I save for retirement?”
The answer is simple - all you have to do is invest in an IRA instead.
In this article, we’ll cover:
An IRA (individual retirement account) is a tax-advantaged savings instrument designed to help people save for retirement.
While most 401Ks are employer-backed (which necessitates the need for a company sponsorship), an IRA can be opened and operated by yourself. However, there are a few employer-backed IRAs that provide companies with a useful 401K alternative for their needs.
As with most savings instruments, you have a number of options to choose from when it comes to the type of IRA you invest in. Here’s a closer look at each one:
The traditional IRA is the oldest and most popular IRA choice today. The key features of such an account include:
Due to the unique nature of taxability here, traditional IRAs are an ideal option for investors who are in a higher tax bracket now than they will be when they retire.
As contributions are tax-free, the tax-savings made here will outweigh the taxes paid on withdrawals when they’re part of a lower tax bracket.
A Roth IRA is a good alternative for investors who won’t benefit from the traditional IRA format. While the annual contribution limits remain the same here, you’ll need to be part of a particular income bracket to qualify for a Roth IRA:
The chief difference between Traditional and Roth IRAs are that with Roth IRAs:
Roth IRAs make sense for people who’ll be in a higher tax bracket post-retirement than where they are right now.
SEP (simplified employee pension) IRAs are set up by employers for their employees. Here are some of its considerations -
Small business owners who’d like to avoid the operational costs of a traditional 401K retirement plan. It’s also a good way for them to get a hefty tax-deduction on all contributions made for their employees.
SIMPLE (Savings Incentive Match Plan for Employees) IRAs are the closest you can get to a typical employer-sponsored 401k.
Companies with under 100 employees. Working with a typical 401k or a SEP IRA may be unfeasible for these parties.
Self-Directed IRAs can adhere to either traditional or Roth IRA eligibility and contribution rules. The only difference here is the freedom given to the investor when it comes to where they choose or want to invest in.
Investors who are looking to diversify their retirement portfolio while taking advantage of market irregularities and a lack of competition. Alternative investments are also a good option for investors who are looking at long-term goals as opposed to short-term returns.
Here are a few leading IRA providers. Read on to find the best one for your unique set of needs.
Alto is the perfect custodian for your self-directed IRA. It allows you to diversify your portfolio by directly investing in startups, real estate and more through partner investment platforms like AngelList, YieldStreet, Groundfloor and more. Alto also allows you to invest in opportunities not present in their partner platforms. As it’s 100% online, you’ll be able to start investing right away.
TD Ameritrade offers first-time IRA investors with all they need to quickly build their investment portfolio. With multiple educational resources, a range of account options and no monthly or annual fees, TD Ameritrade is perfect for beginners.
Vanguard is well-known for their low-cost traditional instruments like mutual funds and ETFs where you can invest using your IRA. There are no transaction fees over these investments which can help you save money in the long run. The downside is that diversifying into non-Vanguard funds is not possible.
Robo-advisors are asset managers who allocate your funds into one of several pre-built portfolios that aligns with your needs. All you have to do is give them your money and they’ll do the rest. Betterment is one of the most reputed and well-known robo-advisors in the industry.
Fidelity is the best overall IRA account provider because it covers all your IRA needs:
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