Your Company Has No 401(k). Now What?
We’re told time and time again of the importance of saving for retirement, and if your company offers a 401(k) plan, the process is pretty seamless. With a 401(k), you simply decide how much of your earnings you want taken out of each paycheck, and your company’s payroll administrator does the rest. And, if you’re lucky, you might even get free money for retirement in the form of a 401(k) match.
But what happens if you want to save for retirement, but your company doesn’t sponsor a 401(k)? An estimated 21% of U.S. employees don’t have access to such a plan, according to data from the U.S. Census Bureau. If you’re part of that group, here are some alternatives to explore instead.
The traditional or Roth IRA
When saving for retirement in a 401(k) isn’t possible, your next option is generally an IRA, either of the traditional or Roth variety. With the former, your contributions go in tax-free and withdrawals are taxed in retirement. With the latter, you don’t get an immediate tax break for funding an account, but your withdrawals are tax-free during your golden years.
As is the case with a 401(k), IRAs give you penalty-free access to your savings beginning at age 59 1/2. The primary difference, however, is that annual contribution limits are much lower for traditional and Roth IRAs than with 401(k)s. If you have a 401(k), you can put in up to $18,500 a year if you’re under 50, or $24,500 if you’re 50 or older. With an IRA, your annual contributions max out at $5,500 a year if you’re younger than 50, or $6,500 if you’re 50 or older.
Now if you aren’t planning or able to sock away more than a few hundred dollars a month anyway, being limited to $5,500 or $6,500 a year may not make a difference to you. But if you were hoping to save more, that’s one drawback you’ll need to work around. Another thing to keep in mind is that if your earnings exceed a certain threshold, you lose the ability to contribute to a Roth IRA. For the current year, that threshold is $135,000 as a single tax filer, or $199,000 if you’re married filing jointly. And while you can fund a traditional IRA and then convert it to a Roth after the fact, many people are put off by that added step.
The SEP IRA
If you’re employed full-time by a company without a 401(k) but have a job on the side that you do as an independent contractor, there’s another savings option you can look into: the SEP IRA. Short for Simplified Employee Pension, a SEP IRA is a retirement plan that self-employed individuals and small business owners are eligible to open.
Like traditional IRAs, contributions go in tax-free with a SEP, and withdrawals are taxed down the line. The key difference is that annual contribution limits are much higher with a SEP IRA than with a traditional or Roth IRA. For the current year, you can contribute up to 25% of your salary if employed by a small business, or 25% of your net self-employment earnings for a maximum of $55,000.
So let’s say you do well at your side gig and earn $25,000 in net self-employment income from it. A SEP would allow you to contribute up to $6,250 a year for retirement, whereas if you’re under 50, you’d be limited to just $5,500 with a traditional or Roth IRA. Of course, for a SEP to make sense or be necessary, you’d need to have a substantial amount of self-employment income to work with, but if that’s the case, it’s another option to explore.
The traditional brokerage account
Let’s imagine you have no 401(k) at work, you’ve maxed out either a traditional or Roth IRA, and you’re not eligible for a SEP. If you still want to make contributions toward retirement, there’s always the option to save in a traditional, non-tax-advantaged brokerage account. The downside, of course, is that you’ll lose the tax breaks associated with IRAs and 401(k)s — meaning, your contributions won’t give you a tax break, and you’ll be taxed on whatever investment gains you earn in your account. That said, you’ll still have an opportunity to accumulate wealth for the future, and your money won’t be restricted like it would be with a 401(k) or IRA. Rather, you’ll have the option to withdraw funds when you want without worrying about penalties.
Though 401(k) plans make it easy to save for retirement, don’t stress if your company doesn’t offer one. You still have several options for building a nest egg so that you’re well-prepared by the time your golden years roll around.
Originally published at www.fool.com on August 1, 2018.
