Las Vegas Review-Journal (Sunday)
What to do when your 401(k) doesn’t cut it
THERE’s a finite list of things you can change at work — and your employer’s less-thanstellar retirement plan probably isn’t among them.
What makes for a lousy 401(k) is somewhat in the eye of the beholder, but characteristics might include limited offerings, high fees or no company match. The following four alternatives can ensure your employer’s retirement plan or lack thereof doesn’t derail your plans for retirement.
Open an IRA
An individual retirement account, of the Roth or traditional variety, can be the answer to an employer-sponsored plan plagued by lackluster options and high fees. An IRA provides comparable tax benefits to a 401(k) but with a broader array of assets and generally lower associated fees.
Take exchange-traded funds, for example. These darlings of the investment world still aren’t offered in a majority of 401(k) plans, according to data from the Investment Company Institute, a trade group. With an IRA, you gain access to ETFs, with stocks, options and bonds. Meanwhile, most employer-sponsored plans are confined to mutual or index funds.
There’s one major downside of IRAs. These accounts carry a lower maximum contribution threshold for tax-benefit purposes than a 401(k): $5,500 versus $18,500 for workers under age 50. The limits increase to $6,500 and $24,500, respectively, for people 50 and older.
Other good-to-knows: Roth IRAs have income eligibility limits, whereas traditional IRAs don’t, though they limit deductions for high earners who have access to an employer plan. The main difference between the accounts is when you’re taxed: now with a Roth, upon distributions with a traditional.
Even if you have a good 401(k), an IRA is a wise choice — and opening one takes only minutes. Review IRA provider options.
Open a taxable brokerage account
If an online brokerage account sounds like something reserved for people who trade stocks all day, think again. These accounts also serve the needs of long-term investors and are a good alternative to a conventional retirement account, especially if you’re looking to invest more than the $5,500 allowed for IRAs.
Like with IRAs, you have access to a broader array of investments than most employer-sponsored plans, with discretion over the associated fees you will pay. But there’s a significant disadvantage: There’s no tax break on contributions, so investments are made only after Uncle Sam takes his bite. Earnings will be subject to taxes, too.
There are a few silver linings to this approach. Brokerage accounts don’t offer tax benefits, so the IRS imposes no limits on the money you can set aside. For buy-and-hold investors, you will be taxed only at long-term capital gains rates, which may be lower than ordinary rates, when you withdraw. Selling investments you’ve held for less than a year will make profits subject to higher capital gains rates.
Get creative
Even if you have a perfectly fine 401(k), there is good reason to pad your retirement nest egg with other accounts. The following alternatives aren’t necessarily difficult to set up, but you need to make sure you qualify and follow the relevant rules.
Got a profitable side gig? Consider opening a SEP IRA — SEP is shorthand for simplified employment pension — which is a retirement account for business owners or self-employed workers. These accounts carry a higher contribution limit in theory — a whopping $55,000 for 2018 — but that’s if you’re making a lot of money. Otherwise, the amount can’t exceed 25 percent of your compensation.
Does your insurance provider offer a health savings account? Good news: There’s a savvy way to use these accounts for retirement, and contributions are tax-deductible and grow tax-free. Money not used for medical expenses can be withdrawn after age 65 and used for any purposes without penalty. Earnings and interest will be taxed as income.
Seek solutions internally
Researching alternatives to a lousy 401(k) plan takes time and effort, and it sure would be easier if your employer just offered a better plan. If only, right?
Have you approached your human resources department about your 401(k)? After all, an attractive retirement plan is one of many benefits companies offer to attract — and keep — employees. Explain what you find lacking about the current plan and identify possible solutions for improvement.
You might be the first person to speak up about the plan — or the hundredth. But you won’t know until you ask.
Some workers with serious qualms about the management of their retirement plans have taken a more drastic approach: going to court. Employees have successfully reached settlements after filing lawsuits against several well-known companies in recent years, including Lockheed Martin and Kraft Foods. This should be a last resort, however, unless years of legal wrangling are your thing.