How to Replicate the Benefits of a 401K

We all need to save for retirement, what the government offers for social security just is not enough to cover all of our expenses and emergencies in retirement.

Unfortunately those of us that own our own businesses are not lucky enough to have an employer who has taken care of setting up a 401K for us.

We have to put in the work to open and manage the 401K. Yet it is not as hard as you would think. The following article is what you need to know about solo 401K’s:   This article cover the Solo 401k for business owners.

Now if you don’t want to go through with a 401K, you do have other options that will help you replicate the benefits of a 401K in order to save for retirement.

Following is a review of what a 401K does and how you might create your own makeshift retirement plan.

What a 401K (or 403B/457) Does:

The 401k does five major things for us when saving for retirement they are:

  • Shelters us from taxes – not only does your money go in pre-tax (we don’t have to pay taxes on the amount we contribute) but we don’t pay taxes on the earnings until retirement.  This allows the money to grow faster since you are not handing over money to the government, more is left for compounding.
  • Some companies offer an employer match with a 401K.  Great way to increase your retirement savings return!
  • Forced monthly savings – when you have a 401(K) you automatically put money in it with every paycheck and when you get a raise you automatically put more away every month.  Automatic investing to me is one of the easiest ways to build a nest egg – set it and forget it.
  • You are allowed to save a good amount each year (2016 = $18,000 if over 50 an extra $6,000).
  • Easy diversification – when you select the funds that you want to invest in you determine how much percentage of your contribution goes into each.  For an example if you get paid $1,000 each pay check and are saving 10% of your income you are having $100 put aside.  If you then have five funds selected you end up putting $20 in each fund.  Most funds will not let you invest this small of an amount outside of a 401(K).  Since you can do this with a 401(K) you build up a more diverse portfolio faster.

How to Create a 401K Replica

Here is how you can replicate some of those 401(K) perks from above.  Note:  This does not include all options for self-employed retirement plans.

Tax Benefits

Utilize all the tax friendly accounts that you can.  The accounts available for this are the IRA (Individual Retirement Account) and the Roth IRA.

The difference between these two accounts is the tax deductibility of your contributions.  With the IRA your contributions are tax deductible up to a certain income level; this is a direct replication of a 401(K).  With the Roth IRA contributions are not deductible, but you do not pay taxes on the contributions OR earnings when you take the money out.

The only negative on these accounts is that you can only put up to $5,500 a year in if you are under 50 and $6,500 if you’re over 50 (as of 2016).  Plus not everyone is eligible for both types, check with your CPA to see if you qualify.

Automatic Savings

To replicate the forced savings have your brokerage company set up automatic withdrawals from your checking account on paydays.  If this money is going into an IRA, divided $5,500 by how often you are having it withdrawn.  This will ensure that you are maxed out.  So for a monthly withdrawal to reach the limit you need to have them take out $458.33 per month.

Saving Larger Amounts

Right now there is not a great alternative to investing more than the IRA limits to get even close to what you could save in a 401(K), but you can save outside of an IRA.  (Small business owners do have options to put higher amounts away. Here is an introduction to self employed retirement options.)

You don’t get the tax benefits, but you can do a few things to improve the rate at which you are taxed.  And most importantly it allows you to keep growing your investment dollars.

Before you invest in a mutual fund, look for their tax analysis.  At you can do this on the Tax page for each fund.  This will show you what impact taxes have on your return.  Tax implications can be for capital gains and dividends.  Select a fund with a low tax impact and you will save more of your return.

You could also go with index funds or invest in stocks to minimize taxes.

When dividing your investments among taxable and non-taxable accounts, put the funds that get the most income and growth into the non-taxable or tax deferred accounts.  For example if you are investing in stocks and a bond fund I would put the bond fund in the IRA.  This protects that income from taxes, while most stocks make their money from capital gains, which are not taxed till you sell and the dividend tax rate is lower.


The diversification can be managed in two ways:

You can invest in mutual funds that will allow you to go as low as $25 a withdrawal.  With this amount you could select four funds at $25 each and get to that low $100 level that you have with a 401(K), but you are still balanced.

Another option would be for you to select one of the target date funds, these funds manage your allocation for you.  They move your money from equities, to bonds and cash the closer you get to retirement.  So depending on how close you are to retirement these funds will be invested across all asset classes.


The hardest benefit to replicate is the matching.  Unfortunately, the matching I don’t know how to replicate, unless you have a rich aunt who would be willing to match!

The most important thing to remember is that you need to be saving for retirement no matter what.  The more of your own money you have set aside at retirement, the more flexibility you have to do what you want.  Don’t be tied to social security or a company’s pension.