Saving without a 401(k) retirement account
Saving for retirement is critical, and for many, employer-sponsored retirement plans are the gateway to the world of saving and investing. However, with the Great Resignation in full swing, many people are finding themselves in new jobs that do not provide 401(k) savings access.
Take me, for example.
Nearly a year ago, I was a financial advisor and retirement planner specializing in 401(k) plans, who himself maxed out his company-sponsored 401(k).
Today, I remain a financial advisor, though I no longer work with 401(k) participants, nor do I have a 401(k) anymore. However, just because I participated in the Great Resignation and lost access to 401(k) deferrals doesn’t mean I skimp on saving and investing. Instead, I stock away funds through other mediums, and you should do so too.
After all, pensions are a thing of the past.
Accounts to save through
401(k) and 403(b) plans are common for those who work at medium to large-sized employers. Yet, for workers at smaller firms, a 401(k) plan might not be offered due to the costs of administering one, or it could be the regulatory stipulations.
Nevertheless, there are plenty of options when saving for your retirement, and having a 401(k) plan is not compulsory. In fact, various options for retirement saving and investing include the traditional IRA, Roth IRA, SE-401(k), SEP-IRA, SIMPLE IRA, HSA, and after-tax brokerage account.
Generally, with all of these accounts, you can invest your savings in various stocks, bonds, mutual funds, ETFs, CDs, sometimes Annuities, and to a limited degree, Options. Thus, your options are plentiful! So, let’s discuss these accounts now in further detail.
Formal retirement accounts for employees without 401(k)s
For workers who don’t have a side hustle or are not self-employed, the easiest way to save for retirement is through a traditional IRA.
Known formally as the Individual Retirement Account, the traditional IRA is a powerful way to save any earned income. Contributions (generally) occur before taxes and then grow tax-deferred. Then, at the time of withdrawal, dispersed funds are taxed as ordinary income. If you are not offered a retirement plan through your employer, you can always make a tax-deductible contribution to an IRA of $6,000. (If you are 50 plus, you can make an additional $1,000 annual contribution.)
While the traditional IRA is popular, a growing number of people now prefer to save via the Roth IRA, where you pay taxes upfront, and then the money grows tax-free. Then, come retirement, any funds withdrawn are not taxed. Ca-ching!
If you are interested in making Roth IRA contributions and don’t have an employer-sponsored retirement account, you may, but only if you make less than $129,000 annually when filing your taxes as single or $204,000 when filing as married. Additionally, there is a phase-out range above these amounts for those who make just above these limits, allowing them to contribute a partial sum to their Roth IRAs.
For more information on Roth IRA phase-outs, you can visit the IRS website here.
For those wondering whether traditional or Roth makes more sense for themselves, please read my in-depth article, Traditional or Roth? How To Choose.
How to save for retirement if self-employed
Suppose you are a contractor or self-employed (side hustles count, but rental income doesn’t). In that case, you have access to a plethora of retirement accounts to fund your future, and popular options include the SEP-IRA, SIMPLE IRA, and Self Employed 401(k).
(Unless otherwise stated, any contributions you make to the following retirement plans occur before taxes and grow tax-deferred until taken out. At withdrawal, funds become ordinary income, and you pay taxes at your corresponding income tax rate.)
With the SEP-IRA, you can contribute up to 25% of your yearly net income, up to $61,000, as of 2022. Though, if you have W2 employees, all workers must receive the same percentage contribution as yourself, up to the prior limits.
With the SIMPLE IRA, you can contribute up to $14,000 of your yearly net income, plus an additional $3,000 if you are 50 or older, as of 2022. Furthermore, you can contribute an additional 2% employer contribution or match your contributions up to 3% of your net income (since you are your employer). However, if you have W2 employees, you must provide them with company contributions or match percentages equal to yours.
With the Self Employed 401(k), known as the SE-401(k) or Solo-K for short, you are allowed to establish and contribute to a plan if you have no employees other than your spouse. Presently, as of 2022, those under 50 can contribute up to $20,500 a year. Further, you are allowed a profit-sharing contribution of up to 25% of net business income. Still, $61,000 is the maximum amount allowed into a Solo-k plan between both methods until you turn 50. Then, you are allowed an additional $6,500 a year contribution that is separate from the $61,000 limit.
Notably, with the SE-401(k), you may make the regular contributions of $20,500 and $6,500 once 50 as either tax-deferred or Roth. But, any profit-sharing contributions you make are before taxes.
For more information on each of these self-employed retirement accounts, please read the following articles I previously wrote:
•The SEParate Side Hustle IRA (SEP-IRA)
•What Is A SIMPLE IRA (And How Does It Work)? (SIMPLE IRA)
•No Savings Party Is Complete Without The Solo-K (Self-Employed 401(k)
And yes, you can pair self-employed retirement accounts with traditional and Roth IRAs without affecting the other’s contribution limits.
Not technically a retirement account
Out of all of the retirement accounts that exist, the HSA is my favorite, even though it technically isn’t a retirement account.
Formally established to help pay for medical expenses tax-efficiently, contributions made to Health Savings Accounts occur before taxes. Additionally, when done via payroll deductions, these contributions aren’t subject to FICA and Medicare withholdings of 7.5%, which no other account can boast.
As of 2022, individuals can contribute $3,600 to their HSA if they participate in a High Deductible Health Insurance Plan (HDHP). For those 55 or older, this limit increases by another $1,000.
If you cover your family with your HSA and HDHP, you can contribute an additional $3,600 to your HSA, bringing the maximum yearly HSA limit to $8,200. (Technically, if your spouse can contribute $1,000 to their own HSA if they are 55 or older, too.)
In the HSA, funds grow tax-free (except in CA and NJ at the state tax level) and are exempt from any taxes when withdrawn for medical expenses. Thus, it is entirely possible to place money into an HSA, invest and grow it, and then take it out without paying taxes.
Not too shabby, would you say?
However, for those who don’t have any medical expenses by and or in retirement, HSA funds can be withdrawn for non-medical reasons and are only taxed as ordinary income once you turn 65.
If you want to learn more about HSAs, read my article, Open An HSA, Now.
The catch-all savings account
You may have additional dollars to save once you have maximized contributions to all tax-preferential retirement accounts. If such is the case for you, rejoice because the after-tax brokerage account has no savings limit and has special tax treatment depending on the duration of your investments. Woohoo!
When investing through an after-tax brokerage account, assets held for one year or longer receive treatment as long-term capital gains.
(Long-term capital gains can be lower the income tax rate. You can check the IRS website to determine your long-term capital gains tax bracket and ordinary income brackets using the links in this sentence.)
Also, because contributions come from after-tax monies, you can withdraw your funds at any time without penalty, which is unlike all of the aforementioned retirement accounts that have early withdrawal penalties (if an exemption reason doesn’t exist). For a list of penalty-free withdrawal reasons, please read my article, How To Withdraw From IRA & 401(k) Plans Without Penalty.
Final thoughts on saving without a 401(k)
401(k) plans can be a great way to save for employees at larger firms. However, for those of us without a 401(k) plan at work, there are still plenty of ways to save and invest for your future, which I hope you have a better understanding of now.
What different accounts have you used to save for retirement, and which are you presently using? Of those, which were your most and least favorite, and why? Let me know in the comments below!
As always, have a great day!
Mile High Finance Guy
finance demystified, one mountain at a time
What would you recommend one do if a company has a 401(K) but no matching, given high income? Would you recommend just throwing max amount of money in so that we can mega-backdoor into a ROTH IRA, or something else?
Hard to say if the 20K of pre-tax into 401(K) with no matching is worth the 30K of backdoor (though I’m assuming if the funds are decent in 401(K), mega-backdooring is a good option regardless).
Angie,
Generally, maximizing 401(k) contributions can be beneficial for those with higher incomes despite no matching since they can lower their overall tax-rate. Doing such may qualify them for regular Roth IRA contributions and help lower their tax-bracket. Further, if the funds are available, the Mega Backdoor Roth is always enticing.
Olaf, the Mile High Finance Guy