What Can I Do In Place of a 401K??

[broketriathlete]

Hey Everyone,

My ultimate question is in the title, but wanted to give you a background so maybe it'll help more.

I just turned 40. I/We have zero personal debt, my homestead is paid off, vehicles are paid off, our rental house is paid off and my wife has hundreds of thousands in her 401K from her previous job along with a lot of Publix stock. She's set. She did it right and started young. She'll have millions in her account by retirement age. I have been maxing out a Roth IRA for the last 6 years and will continue to do so. I'm lacking in the investment department for sure. I do have a 6 month emergency fund for the both of us. We've always kept our finances separate, but do talk about them a lot. It works for us.   

I own a pool service company with about 14 employees total, including myself and my wife. We finally were able to offer full PPO health, vision, dental and life to our team this year. We provide company cell phones, two paid weeks off, PTO separate from the paid two weeks off and a company gym membership. We also pay our team very well for their job ($10/hr over the competition @ $25- $34/hr depending on position). We had an offer to be bought out for $1.6mil last year, but declined because we'd run out of money with how young we are now. So I can only assume we can sell for more down the road as we grow, but I'm not counting on that in this equation. I am also part owner of a pool renovation and construction company, but that is a hit or miss type of business. I'm not counting that in this equation either.

I was literally talking to my payroll company about getting retirement benefits going just this week. Then yesterday, I get a call from my commercial auto agent that our policy is going up $25,000 per year (So just over $100K/year) on the renewal. "It's just the way it is with Commerical now." Was the response. That's with our same carrier that is still the cheapest for our coverage too. We've never had an at fault accident or any driving violation for the entire tenure of the business. That really pissed me off because I felt like there goes the retirement plans.

There's only so much we can charge for pool service and I don't think there's enough meat on the bone to swing retirement after all the rising costs of EVERYTHING. We are also starting to lose clients over a $5/month raise so I think we are very near the ceiling of what we can charge in my area.

Is there anything else I can do right now other than my IRA in hopes of starting a 401K when company allows? I'm can very comfortably max out a 401K, and if I do for the next 25 years it should put me in the 2mil mark (used 8%), along with my IRA, along with whatever my wife has, along with whatever my business sells for. Or should I get a part time job somewhere, like Publix, that has a 401K once you're vested?

It just irritates me this unexpected insurance rise has caused me (for now) to be unable to start a 401K. I wish there was a 401K option for just owners haha.

Any input would be appreciated on ideas for retirement outside of 401K, for now. TIA

Edit: Grammar

[Tasse]

I can't advise on the business owner end about what might be possible to offer.

However, if it turns out you really aren't eligible for any other retirement options, you may want to just invest in a normal brokerage account. There is no tax deduction when you invest, which is a bummer. But the upsides are (a) no limits on when you can take that money back out, so no fears about accessing it in early retirement, (b) complete control over what you invest in, and (c) 0% tax on long-term capital gains if you can keep your taxable income under $47k separate / $94k joint filing.

This is kind of your last resort option, but I just wanted to put the idea out there that it's not such a bad one. Over 25% of our NW is in a taxable brokerage.

[SeattleCPA]

You ought to at least consider more real estate investing.

The thing with real estate is, it is a way to invest large sums pre-tax. With a 401(k), in comparison, you're talking $69K limit for 2024. And because you have to cover employees, your practical limit is much lower. Probably somewhere between $25K and $35K annually.

With real estate, in comparison, your apples-to-apples "pre-tax" investment limit is the sum of the following:

• Your total business income (so what shows on a K-1, Schedule C or Schedule E)
• Up to $605K of your W-2 or portfolio income.

You can literally shelter probably every dollar you earn.

Further, as a business owner, you have tremendous flexibility: You could buy a building for your firm. You can possibly do short-term rentals. You might even be able to use your existing business to qualify for real estate professional status.

BTW want to stipulate that I'm not saying you should do real estate. Or that it's a guaranteed great investment. But you can save a lot of pre-tax money into real estate. A lot...

Thus it'd be worth considering?

[MustacheAndaHalf]

You can still save money and invest, even without a 401(k) plan.

Total stock market ETFs (VTI, ITOT) buy the entire market and hold it.  I'm not a tax expert, but for me the qualified dividends are in a lower tax bracket.  Selling shares after 1+ years also incurs lower taxes.  If you wanted to get as low a tax impact as possible, to replace a retirement plan, that would be my approach.

Most likely you'll need some diversification into international and bonds, which are better held in retirement accounts.  Yes, there's a foreign tax credit, but international stocks generate much higher dividends than U.S. stocks last I checked, so the tax impact is actually greater overall.  I prefer to put bonds in retirement accounts, and maybe international if it fits.

[Dollar Slice]

I'm absolutely not an expert on this, but maybe look into a SIMPLE IRA instead of a 401(k) for your business? They are meant to be cheaper, simpler retirement plans for small businesses with easier reporting requirements. Basically lets you invest much higher amounts of money than an IRA without the paperwork and expense of a 401(k).

I don't know a lot about it so there may be a catch that I don't know about. But I'd give Vanguard (or whoever you invest with) a call and ask about it, just in case it would work well for you.

[Omy]

If you can't raise rates and insurance is going crazy, what makes you think the pool business is going to keep growing? Maybe selling IS a great option. Taxes, expenses, insurance, and wages are all going up...if you are having challenges keeping up with those increases, take the money and run!

It sounds like you're a great entrepreneur...use the proceeds to start another company or invest in more rentals...or retire early!

[broketriathlete]

I'm absolutely not an expert on this, but maybe look into a SIMPLE IRA instead of a 401(k) for your business? They are meant to be cheaper, simpler retirement plans for small businesses with easier reporting requirements. Basically lets you invest much higher amounts of money than an IRA without the paperwork and expense of a 401(k).

I don't know a lot about it so there may be a catch that I don't know about. But I'd give Vanguard (or whoever you invest with) a call and ask about it, just in case it would work well for you.

I will definitely look into this. As a small business that sounds like right up our alley. Do you have any idea if the contribution amount includes all IRA's in totality, or are they separate? I will research this. Thank you!

[broketriathlete]

If you can't raise rates and insurance is going crazy, what makes you think the pool business is going to keep growing? Maybe selling IS a great option. Taxes, expenses, insurance, and wages are all going up...if you are having challenges keeping up with those increases, take the money and run!

It sounds like you're a great entrepreneur...use the proceeds to start another company or invest in more rentals...or retire early!

This has crossed my mind a million times. My wife was an AGM of a Marriott before she came over to my company. She worked there for 14 years, basically like her first job and worked through every position to that. If she didn't just come over a 2 years ago I would have already sold this thing. I hope that makes sense. But yes, it's been on my mind a lot lately.

[broketriathlete]

You ought to at least consider more real estate investing.

The thing with real estate is, it is a way to invest large sums pre-tax. With a 401(k), in comparison, you're talking $69K limit for 2024. And because you have to cover employees, your practical limit is much lower. Probably somewhere between $25K and $35K annually.

With real estate, in comparison, your apples-to-apples "pre-tax" investment limit is the sum of the following:

• Your total business income (so what shows on a K-1, Schedule C or Schedule E)
• Up to $605K of your W-2 or portfolio income.

You can literally shelter probably every dollar you earn.

Further, as a business owner, you have tremendous flexibility: You could buy a building for your firm. You can possibly do short-term rentals. You might even be able to use your existing business to qualify for real estate professional status.

BTW want to stipulate that I'm not saying you should do real estate. Or that it's a guaranteed great investment. But you can save a lot of pre-tax money into real estate. A lot...

Thus it'd be worth considering?

Thanks for the ideas. It's really hard to invest in real estate in my area. There's really not any vacant land left and houses are still in the "insane" price range. I was really hoping for the market to correct itself or at least somewhat come back down to reality. We did buy a small piece of land to build on for the company so we have that going I guess haha. We put it in a separate company so one doesn't affect the other.

[Omy]

If you can't raise rates and insurance is going crazy, what makes you think the pool business is going to keep growing? Maybe selling IS a great option. Taxes, expenses, insurance, and wages are all going up...if you are having challenges keeping up with those increases, take the money and run!

It sounds like you're a great entrepreneur...use the proceeds to start another company or invest in more rentals...or retire early!

This has crossed my mind a million times. My wife was an AGM of a Marriott before she came over to my company. She worked there for 14 years, basically like her first job and worked through every position to that. If she didn't just come over a 2 years ago I would have already sold this thing. I hope that makes sense. But yes, it's been on my mind a lot lately.

You sound like a power couple with lots of options. If you haven't had a good long chat about the future recently, start now. It sounds like you are in a good place to create whatever future you want.

[SeattleCPA]

It's really hard to invest in real estate in my area. There's really not any vacant land left and houses are still in the "insane" price range. I was really hoping for the market to correct itself or at least somewhat come back down to reality.

Absolutely not saying real estate is always great financial choice. But as a note, it's not a bad option to look outside your locality.

We did buy a small piece of land to build on for the company so we have that going I guess haha. We put it in a separate company so one doesn't affect the other.

Structured correctly, you should be able to use losses in one entity to shelter income in another entity. But your tax accountant and you both need to understand and take time to optimize the Section 469 passive loss limitation rules including what they say about material participation and "groupings."

So stuff like I talk about here: https://evergreensmallbusiness.com/grouping-activities-to-achieve-material-participation/

[Dollar Slice]

I'm absolutely not an expert on this, but maybe look into a SIMPLE IRA instead of a 401(k) for your business? They are meant to be cheaper, simpler retirement plans for small businesses with easier reporting requirements. Basically lets you invest much higher amounts of money than an IRA without the paperwork and expense of a 401(k).

I don't know a lot about it so there may be a catch that I don't know about. But I'd give Vanguard (or whoever you invest with) a call and ask about it, just in case it would work well for you.

I will definitely look into this. As a small business that sounds like right up our alley. Do you have any idea if the contribution amount includes all IRA's in totality, or are they separate? I will research this. Thank you!

It looks like you can do both together. I haven't seen any mention anywhere of combining the balance.

The IRS:
Can I contribute to a traditional or Roth IRA if I'm covered by a retirement plan at work?
Yes, you can contribute to a traditional and/or Roth IRA even if you participate in an employer-sponsored retirement plan (including a SEP or SIMPLE IRA plan).

This page is a good overview. https://www.empower.com/the-currency/money/simple-ira

[mistymoney]

why is this 25k expense derailing the plans for the 401k?

(Something like vanguard shouldn't be too costly to implement. What companies have you considered, and what is the cost to setup and service? Would something like vanguard be free with vanguard funds?)

Was it due to a planned match for everybody that makes it cost prohibitive?

If due to a planned match, could maybe just set up the 401k with out a match, or a very low one. Even without a match, 401ks add value to the employee. And rather than a straight % match - could be a once/year profit sharing match so would not commit you to a set amount.

[J.P. MoreGains]

(c) 0% tax on long-term capital gains if you can keep your taxable income under $47k separate / $94k joint filing.

How does this work? Do you mean when you are already retired if you only take out less than $47k for income for the year you won't pay capital gains taxes? Or does it work another way. Sorry new to all of this and this caught my attention.

[terran]

(c) 0% tax on long-term capital gains if you can keep your taxable income under $47k separate / $94k joint filing.

How does this work? Do you mean when you are already retired if you only take out less than $47k for income for the year you won't pay capital gains taxes? Or does it work another way. Sorry new to all of this and this caught my attention.

The standard deduction in 2024 is $14,600/$29,200 single/married. You don't pay tax on that regardless of the type of income.

The top of 0% long term capital gains income tax bracket is $47,025/$94,050 single/married.

So you could have up to $61,625/$123,250 of qualified dividend and long term capital gain income and pay $0 federal tax. Realistically you're likely to have some non-qualified dividend income, so that would have to stay under the standard deduction to pay no federal tax. You might still owe state tax and that much income would reduce any ACA health insurance subsidy you might hope to get.

Capital gains income is the amount you sell it for minus the amount you buy it for, so you would have even more spendable cash if you sold enough stock to generate that much long term capital gains income.

[ChpBstrd]

SEP IRA overview:
https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep

SIMPLE IRA overview:
https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-simple-401k-plan

Overview of all retirement plans:
https://www.irs.gov/retirement-plans/plan-sponsor/types-of-retirement-plans

*Note: Have to give the IRS writers credit here. Their outline-like presentation of information is much improved and simplified compared to the long winding narratives of yesteryear.

Corporate 401k plans are usually administered at no cost or minimal cost to the employer, because the company managing the 401k obtains their compensation through higher expense ratios on the funds, net interest, fees, etc. You might just need to find a provider interested in a 15 person company. This might be one of the shitty 401k plans we often complain about here, with >1% expense ratios on everything, but it's something. Shop based on ERs, because you'll have to pay them too!

If your payroll provider has no good leads, check with your local bank or credit union, ask your suppliers and customers who they're using, or skim the BBB directory. I guarantee there are salespeople out there somewhere desperately looking for you. Here are some initial leads and contextual info:
https://money.usnews.com/money/retirement/401ks/articles/how-to-pick-the-best-small-business-401-k-plan-provider

[Much Fishing to Do]

You can still save money and invest, even without a 401(k) plan.

....I'm not a tax expert, but for me the qualified dividends are in a lower tax bracket.  Selling shares after 1+ years also incurs lower taxes.  If you wanted to get as low a tax impact as possible, to replace a retirement plan, that would be my approach.

+1.  I had many years stuck with no 401k and so ended up with a large taxable account.  You can recognize quite a lot of income in retirement and still be at 0% cap gains rate which is great, and you also don't have to worry about any age limitations on withdrawals.  THis is obviosuly easier to stomach if you are not currently in the highest tax brackets.

I then had a number of years where a solo 401k was available with its large maximum and so built that at that time which was helpful given those were my very high income years (including my only year in the highest tax bracket)

It gives you a lot of flexibility to have both to draw from in retirement, and given your wife's large 401k is being built, for you to be stuck with taxable investments for now should work out just fine.