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In the 1980’s, employer offered pension plans went the way of the Dodo bird, and were replaced in large part by a 401(k). The 401(k), which is unimaginatively named after the section of code that lays out the rules for them, is a retirement plan that both the employee and employer pay into. But one of the things that makes a 401(k) unattractive to many is that the employer does not have to offer a 401(k) or pay into it right away.

In addition, you have to closely monitor your 401(k) because you can only contribute so much tax free, and you need to change your contribution amount when you get a raise if you want to keep up with the cost-of-living later.  Whether you are dissatisfied with the restrictions on a 401(k) or it simply is not available to you, you can still prepare for life after work.  Here are some investment alternatives to planning for retirement.

Option One: A Traditional IRA

A traditional individual retirement account allows you to put money into it up to specific limits each year (currently $5500), and the growth of these accounts are tax deferred, which means you won’t have to pay taxes on them you begin to take distributions There are no income caps as there are with a Roth IRA.  Generally, these investment alternatives are held by banks and brokers, but IRA funds can be put into stocks, bonds, funds and other assets.

Option Two: A Roth IRA

A Roth Individual Retirement Account (IRA) is similar to a traditional IRA but the contributions to it aren’t tax deductible, however the qualified distributions are made tax-free. There are different qualifications for the Roth IRA eligibility. Income caps apply to those applying for Roth IRA based on tax filing status. The caps are currently $129,000 max if filling Single; $191,000 if filing a Married Joint return.

Qualified distributions or withdrawals are tax free, but non-qualified distributions may incur a penalty. The things that count as a qualified distribution must be five years after the IRA has been started and include:

  • Withdrawal to purchase your first time home purchase, up to $10,000

  • The person that established the IRA is deceased.(The beneficiary collects the withdrawal)

  • The person who established the IRA is disabled or at least at 59 and a half.

Option Three:  A SEP IRA

A SEP or Simplified Employee Pension IRA is available if you do any freelance or contract work as an independent sole proprietor or are self-employed, a SEP IRA can provide an opportunity for you to establish a retirement account.  A SEP IRA operates under the same rules as a traditional IRA however the contribution can be as high as 25% of income.  There are additional rules that apply to a SEP.

Option Four:  Annuity Account

An annuity has several forms – immediate or deferred, fixed or variable.  With an annuity, the investment grows tax deferred during an “accumulation period” and periodic payments are made during the “payout period.” Those payment can be a fixed amount based with a fixed annuity, or they can be variable based on the performance of the investment.

As you can see, there are many options outside of a 401(k) for individuals to invest and plan for retirement.  Each plan has its own set of rules, regulations, requirements, limits and it is advisable to see the advice of a financial professional before making a final selection on your retirement portfolio.

Brad Smith is the CEO and a co-founder of Rescue One Financial, headquartered in Irvine, California. Rescue One Financial helps individuals with unsecured debt during troubling times.  Brad writes a twice-weekly blog published on the Rescue One Financial web site, has authored a number of published articles, and is a regular guest contributor to US-based radio and television financial programs. Brad holds a BA in Economics from the University of Southern California.

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