How to save for retirement without a 401(k)

Millions of people use 401(k) accounts each year to save for retirement.

These tax-advantaged savings accounts invest your money in long-term mutual funds, stocks, bonds, and other securities to grow your reserves over time.

But there’s a catch: You can only open a 401(k) at work — not all employers offer it.

About 33 percent of private-sector workers will not have access to any employer-sponsored retirement plan in 2020, the data shows. Bureau of Labor Statistics.

Part-time workers and those with the lowest wages are even less likely to have jobs with retirement plans.

The truth is, you don’t need an employer to save for retirement. (Though 401(k)s are still great, especially if you get an employer match.)

You can control your future and save for your retirement. We promise – it’s not as difficult or scary as it sounds.

4 Ways to Save for Retirement Without a 401(k)

1. IRA

Anyone with income can open an individual retirement account or IRA.

Unlike a 401(k), these retirement accounts are not tied to your job. They give you more physical control and generally offer more investment options than 401(k)s.

Opening an IRA is easier than ever, thanks to low-cost robo-advisers and convenient micro-investing apps. We’ll dig into these soon.

But first, let’s discuss two types of IRAs: Tradition and Ross. Both offer sweet tax breaks, but in different ways.

Generally speaking, contributing to a Roth IRA makes sense if you plan to retire with a higher tax bracket, while a traditional IRA may be better if you plan to retire with a lower tax bracket choose.

Another way to think about it: A traditional IRA can help you save on your annual taxes, while a Roth IRA can help you save on taxes in retirement.

Traditional IRA

One Traditional IRA Let you worry about taxes later. You deposit money into your account today and enjoy tax-free growth until you withdraw it.

When you withdraw your funds, you will pay income tax. How much you owe depends on the tax bracket in the year you made the withdrawal.

If you withdraw before age 59-½, the IRS imposes a 10% penalty (unless you qualify for an exception). The money in your account is earmarked for retirement, so the government won’t be kind to early withdrawals.

Traditional IRA Facts

• In 2022, you can donate up to $6,000 per year, or $7,000 if you’re 50 or older.
• Beginning at age 72, you must withdraw the required minimum distribution (mandatory withdrawal) from your account.
• Withdrawals are taxed as ordinary income.
• Early withdrawals before age 59-½ will be subject to a 10% tax.
• Contributions are usually tax-deductible.

The last item is the key. When tax time approaches, any money you add to your account throughout the year reduces your taxable income, which can lower your tax bill or even increase your tax refund.

However, not everyone can claim this deduction.

• If your employer offers a retirement account (even if you don’t: For tax year 2021, your adjusted gross income must be less than $66,000 for single filers (or $105,000 for married couples filing jointly) to claim the tax deduction for your traditional IRA contributions.
• If your employer does not provide retirement accounts: You can claim a tax deduction on your contributions regardless of your income.

Roth IRA

Roth IRA There are tax benefits today, but allow you to withdraw money tax-free in the future.

You fund your account with money after taxes. It’s tax-free, and you don’t owe any income tax on withdrawals.

However, you won’t get a break on your tax return: contributions to a Roth IRA are not deductible.

Roth IRA Facts

• You can donate up to $6,000 per year, or $7,000 if you’re 50 or older.
• You can withdraw your contributions at any time, tax- and penalty-free.
• Currency growth tax-deferred.
• Contributions are not tax-deductible.
• There is no minimum distribution required.

High earners cannot contribute to a Roth IRA. By 2022, single filers can open a Roth account if their revised adjusted gross income is less than $144,000, or $214,000 for married couples filing jointly.

One of the great benefits of a Roth retirement plan is that you can withdraw your contributions at any time, tax-free and penalty-free. Any of your own original funds that you put in, you can withdraw without paying income tax.

However, you can only pull income (New funds from your investments) are withdrawn from a Roth IRA after age 59-½ and after you have owned the account for at least five years.

Otherwise, withdrawing investment income may trigger taxes and a 10% early withdrawal penalty.

How do you open an IRA?

You don’t need to talk to a person to open an IRA online. Isn’t technology great?

Robo-advisors and micro-investing apps make it super easy to get started. You can also open an IRA with most financial institutions and brokerages, such as Charles Schwab, Fidelity or TD Ameritrade.

robo-advisor

IRAs give you more investment options than 401(k)s. Great if you have investment experience, not so great if you are just starting out.

but robo-advisor can diversify your IRA portfolio for you, Exchange Traded Funds (ETFs) and index funds, depending on your age, risk tolerance and goals. Most offer useful retirement planning and personal finance tools to visualize and easily manage your investments.

Many bots charge an affordable 0.25% annual account fee with low or no account minimums.

For most investment platforms, you can choose between a traditional or Roth IRA — or both. Some people also offer SEP IRAs for the self-employed.

Micro Investment App

Small investment application like Tibetan and Acorn Easily set up small, recurring contributions to your IRA. Plus, you can start investing with as little as $5.

Like robo-advisors, they are easy to use, convenient, and automated.

However, you may end up paying more over time due to the app’s monthly subscription model. For example, Stash and Acorns charges $3 to access a Roth or traditional IRA.

Compared to discount brokers and robo-advisors, paying $36 a year for a retirement account is steep, especially for users with smaller account balances.

2. Health Savings Account

Using a health savings account (HSA) to save for retirement may seem like an odd idea.

But an HSA isn’t just a way to pay for what high-deductible health insurance can’t. They offer huge tax benefits and also make them a smart way to save for the future.

Think of it as your healthy 401(k).

HSAs are said to have triple tax benefits because:

1. Contributions are tax-deductible.
2. The money in the account grows tax-free.
3. Distributions are always tax-free when used for qualifying medical expenses.

An HSA allows you to save tax when you contribute. The funds in your account roll over year after year, and any contribution you make will be tax deductible.

If you withdraw funds from your HSA to pay for eligible health care expenses, you will never pay taxes or penalties. When you turn 65, you can use the money in your HSA however you want.

Best of all: You can invest in your account just like you would invest in a 401(k) or IRA. This allows your funds to grow over time rather than sitting idle like in a traditional savings account.

It’s important to remember that some HSA providers offer more and better investment options than others.

Some stipulate minimum balance requirements, transaction fees or investment fees. Almost all providers charge an annual account fee.

Technically, you can open an HSA even if your employer doesn’t offer one. However, you cannot contribute to the account unless you are covered by a high-deductible health plan.

You also cannot add funds if you are enrolled in Medicare or Medicaid. (However, you can withdraw HSA money from your account in retirement to pay for things not covered by Medicare, such as glasses or hearing aids.)

With an eligible high-deductible health plan, you can contribute up to $3,650 per year to your HSA or up to $7,300 for your family in 2022.

3. Traditional brokerage accounts

A traditional brokerage account provides investment for your retirement goals but lacks the special tax deductions that IRAs, 401(k)s and similar plans offer.

A traditional brokerage account is also known as a taxable investment account. When you sell securities for a profit, you usually owe taxes, even if you didn’t withdraw money from your account. You will also pay tax on any dividend income.

Realized gains are taxed at your normal income tax rate or the lower long-term capital gains rate, depending on how long you own the securities.

But that’s not always a bad thing. In some cases, it actually makes sense to use a taxable investment account.

First, you can withdraw money from your taxable account at any time, regardless of age. You won’t be penalized by the IRS 10%. (Though you may face strict income capital gains taxes.)

This can benefit a taxable investment account if you save for other medium- and long-term goals, such as buying a home.

Another benefit is that you can add as many funds as you want: there are no contribution limits. So if you’ve maxed out your IRA or HSA, a taxable account can be attractive.

Quick reminder: A traditional brokerage account lets you buy and sell investments like stocks, bonds, ETFs, and mutual funds. You can open accounts with financial institutions, online brokers, robo-advisors and investment apps such as Robinhood and E*TRADE.

4. Self-employed retirement accounts

Small business owners and self-employed individuals have a few other retirement savings options.

September IRA

Most major brokerages offer simplified employee pension IRAs (SEP IRAs), and they’re easy to set up.

A formal written agreement is required, but the brokerage firm will usually handle it for you.

Any business with one or more employees can open a SEP IRA, including independent contractors, self-employed, sole proprietorships, LLPs, C corporations, and S corporations.

This makes these accounts ideal for freelancers, independent entrepreneurs, and gig workers.

SEP IRAs offer higher contribution limits than traditional or Roth IRAs.

Through 2022, you can contribute up to 25% of your adjusted net income or $61,000 – whichever is lower.

Because you can add employees to a SEP IRA, these accounts are also attractive to individual business owners who plan to add employees to their payroll in the future.

401(k) only

If you are self-employed or have a business with no employees, you can open a self-employed 401(k), also known as a separate 401(k).

You have two savings opportunities – as an employee and as an employer.

As an employee, you can contribute up to 100% of your pay in tax-free or Roth retirement benefits, up to $20,500 in 2022 (or $27,000 if you’re 50 or older).

Best of all, as an employer, you can contribute up to 25% of your income. However, total donations for 2022 (excluding additional donations for those 50 and older) cannot exceed $61,000.

If you earn profits from a sole proprietorship, LLC, or any other business organization, you are eligible to open a separate 401(k) as long as you have no employees other than yourself and your spouse.

The Uniqueness of Self-Employed 401(k)s

• Those aged 50 and over can make an annual supplement.
• You can make a Roth contribution.
• You cannot add employees to the plan (except your spouse).
• Opening an account can be trickier and more time-consuming than opening a SEP IRA.
• May offer higher annual contribution limits and greater tax relief than SEP IRAs.

Rachel Christian is a certified educator in personal finance and senior writer for The Penny Hoarder.

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