How To Save For Retirement When You Don’t Have A 401
Self-employed workers have savings plan options. And if you move fast, you can still contribute for the 2021 tax year.
Most Americans have seen their retirement plans rebound since the start of the pandemic two years ago. But theres a sizable group that is still struggling to catch up.
Those in the latter group tend to lack a company retirement plan like a 401 . Many are freelancers, who arent eligible for company benefits, and self-employed workers.
But you dont really need an employer to build a retirement plan. And the sooner you start, the better. The deadline for contributions to an individual retirement plan, like an IRA, is for the 2021 tax year.
Overall, 79 percent of Americans say they are confident theyll be able to retire when and how they want, but 1 in 4 are now less confident in their plan than they were two years ago, according to a recent survey by Fidelity.
As other studies have found, participation in a retirement plan is closely linked to workers confidence. Some 78 percent of those covered by a 401, an IRA, or a pension are at least somewhat confident about retirement, compared with just 43 percent of those who arent, a 2021 study by the Employee Benefit Research Institute found.
For most workers with 401s, theres an advantage of a company match, says Craig Copeland, senior research associate at EBRI. Another big effect is automatic savingthe money comes out of the paycheck before its spent.
How Can I Save For Retirement Without One
There are lots of people who are looking for ways to save for retirement without relying on a 401, but they might be worried about their 401 losing value or they might not have it available to them at their job. One of the most common retirement vehicles that someone will use is called an IRA. An IRA is an individual retirement account. Two of the most common types of IRAs are traditional IRAs and Roth IRAs. Some people who are self-employed also use something called a SEP-IRA. One of the advantages of using an IRA is that the contributions are tax-deductible. In some cases, people claimed this deduction when they contribute to the IRA. In other cases, people claimed this deduction when they pull money out of their IRA. If people decide to make contributions to an IRA, they might be able to save money on their taxes.
On the other hand, there are some people who are simply worried that they are going to lose money if they invest in the stock market. They may not be comfortable with their knowledge base or they might not have time to track the market that closely. The good news is that there are other resources available to individuals who would like to save for retirement without having to rely on the stock market.
Keep In Mind That You Can Set Up Multiple Types Of Retirement Accounts
You dont have to pick one retirement accounts. You can open several.
For example, Eweka says her favorite IRA mix is the SEP and using a regular Roth or traditional IRA because, she says, If you can do more than the $6,000 a year that youre limited to with IRA, then with an SEP you can contribute up to 25% of your income with some calculations.
And, of course, people who have a 401 through their work can still open an IRA on their own separately.
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Speak To A Financial Professional
When it comes to saving for retirement, a financial professional can be a huge help. They can assist you in setting up a plan and determining what your goals should be.
Financial professionals can also help you find the best way to save for retirement, whether thats through a 401K, an IRA, a Roth IRA, or a taxable brokerage account.
Simplified Employee Pension Ira
Another option for self-employed folks is the SEP-IRA. Theyre primarily used by small-business owners who want to help their employees with retirement, but freelancers and the self-employed can also use this option. An advantage of the SEP-IRA is a much higher contribution limit than traditional and Roth IRAs, but unfortunately, there is no Roth option. You can contribute to your own retirement this way, but again, you cant exceed either 25% of your income or $61,000 .7
This is a good plan to consider if youre thinking about hiring employees in the future as your business grows. But remember, contributions made to yourself must be the same percentage made to your employees. So, if you put 15% of your salary into your account, you must also contribute 15% of your employees salary into their plan.
Now, lets explore another retirement option for small-business owners with employees.
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How A Tiaa 401k Can Help Academics Save For Retirement
If you are an academic or are a member of a college, a TIAA 401k can help you save for retirement. TIAA, or the Teachers Insurance and Annuity Association of America, is a Fortune 100 financial services company that offers a diversified portfolio of retirement products. The companys financial services focus on academic, research, medical, cultural, and governmental fields.
This retirement plan has a long history of incorporating new strategies before they became mainstream. In the late 1970s, TIAA was one of the first institutions to offer international stocks and added a CREF Social Choice Account as an option for socially responsible investing. The next decade saw TIAA enter the 529 market, offering both fixed and variable annuities to fund the accounts.
Another TIAA 401k plan is the TIAA CREF plan, which is also a defined contribution plan, though it differs from the TIAA 401k in many ways. Unlike a 401, a TIAA CREF plan is funded entirely by fixed and variable annuities. This means that the funds are invested in securities that will pay higher returns over time.
The TIAA 401k plan has two main types of funds. The TIAA Traditional fund focuses on longer-term, illiquid assets that pay a higher interest rate. The TIAA RC plan is the bond side of the portfolio. The TIAA 401k can serve as the bond side of your retirement investment portfolio. There are nine versions of the TIAA CREF.
How Can I Withdraw Money From My 401k Without Penalty
Here are the ways to get free withdrawals from your IRA or 401
- No medical payments.
- For entry purposes.
What qualifies as a hardship withdrawal for 401k?
Eligibility for Retirement Difficulty Certain medical expenses. Home purchase expenses for a main residence. Up to 12 months of schooling and expenses. Expenses to prevent them from being foreclosed on or expelled.
When can you withdraw from 401k tax free?
Stashing pre-tax cash on your 401 also allows you to grow it tax-free until you pick it up. There is no limit to the number of withdrawals you can make. After you turn 59, you can withdraw your money without having to pay an early retirement penalty.
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Ways To Invest Outside Of Your 401
Editorial Note: The content of this article is based on the authors opinions and recommendations alone and is not intended to be a source of investment advice. It may not have not been reviewed, commissioned or otherwise endorsed by any of our network partners or the Investment company.
So youve got plans to max out your 401 and your emergency fund is cash-flush. What next?
You have plenty of options, many of which weve listed below. Wherever you put your money, remember that each type of investment comes with drawbacks. You should understand your risk tolerance and be comfortable with the potential pitfalls involved before getting started with a new investment. Asset diversification is a way to offset the potential risks do not put all your eggs in one basket. If you are looking to diversify your assets, here are 10 ways to invest outside a 401. Weve put them in order of how complicated it is to get started with these investment strategies.
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Keep Things In Perspective Through Good Times And Bad
Historically, the stock market has seen average returns of about 10%. The key word in that sentence is average. There have been years when the benchmark S& P 500 has grown more than 20%. And then there are years when its performance has sunk deep into the red.
When youre investing for long-term goals like retirement, remember that after all periods of negative performance, the stock market has recovered its losses and kept moving higher. So dont get too hung up on your retirement portfolios performance from day to day, or even from month to month or year to year.
Retirement is a long game, so you need to take the long view.
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How To Save For Retirement Without A 401
11 Min Read | Jul 15, 2022
If youre frustrated by all the retirement planning advice that puts the 401 center stage, youre not alone. Nearly one-third of all workers dont have access to an employer-sponsored retirement savings plan.1 And even though some employees have a 401, not all employers offer to match what their workers put into it.
But even if you dont have a 401 option or if your plan doesnt include an employer match, dont panic! You still have plenty of options to help you save for retirement even without a 401. With great options like the Roth IRA , Solo 401, SEP-IRA plans and a few more you can still reach your retirement goals
Heres how to save for retirement when you dont have a 401starting with our favorite retirement investing tool: the Roth IRA.
Wait But What About Bitcoin
Bitcoin has had a wild ride, often moving thousands of dollars a day. And its been in the news constantly. But, as with any high-risk financial move, you shouldnt invest unless you are willing to lose it all. There are no consumer protections on Bitcoin. If Bitcoins are lost or stolen, they are gone forever.
That being said, if you are curious about it and want to learn how it works, you can throw in $20 or $100 to buy through a digital currency exchange or broker. You can read more about the cryptocurrency craze in our ultimate Bitcoin guide.
Best for: Curious investors willing to experiment and potentially lose.
The Find a Financial Advisor links contained in this article will direct you to webpages devoted to MagnifyMoney Advisor . After completing a brief questionnaire, you will be matched with certain financial advisers who participate in MMAs referral program, which may or may not include the investment advisers discussed.
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Option : Keep Your Savings With Your Previous Employers Plan
If your previous employers 401 allows you to maintain your account and you are happy with the plans investment options, you can leave it. This might be the most convenient choice, but you should still evaluate your options. Each year, American workers manage to lose track of billions of dollars in old retirement savings accounts, so you should make sure to track your account regularly, review your investments as part of your overall portfolio and keep the beneficiaries up to date.
Some things to think about if youre considering keeping your money in your previous employers plan:
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Additional Ways To Save For Retirement
You might not have a 401K at work, or if youre self-employed and dont want to deal with the hassle of setting one up, there are still other ways to save for retirement.
As long as you have money coming in each montheven if its just enough for a bus passyou can start putting some of it away towards your future. The best way to do this is to have the money automatically withdrawn from your checking account and deposited into a savings or investment account.
If you cant afford to save a lot each month, thats okay. Even $20 a month can add up over time. And if you start saving early, youll be ahead of the game. The sooner you start saving, the more time your money has to grow.
Here are some other ideas for how to start planning for retirement:
If You Can Contribute More Than $6000 A Year And You’re Self
If you’re a business owner or self-employed person with no employees and you want to set aside more than $6,000 a year, you might want to consider a Solo 401 ).
With this retirement plan, you play the role of both the employer and the employee, which allows you to contribute to the plan in both capacities outlined in #1). In total, you can contribute up to $58,000 for 2021.
Like the employer-sponsored 401 and the traditional IRA, you’re not taxed upfront for the money you put in, but you are charged when you withdraw money in retirement.
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Roll Over Your Old 401 Into An Ira
Leaving a job to start your own business or freelance work? Its possible to take your old 401 with you! This is called a 401 rollover. You can use a direct 401 rollover to move a traditional 401 into a traditional IRA account or a Roth 401 into a Roth IRA account tax-free. A rollover also does not count toward your contribution limit. This allows you to open an IRA, create a nice foundation, and continue investing.
Now, you can potentially roll over your traditional 401 into a Roth IRA , but there are big tax implications to considermeaning it might not be the right choice for everyone. And you should never ever withdraw the money yourself to roll overdon’t even touch it! Thats considered an early withdrawal and youll get slapped with a 10% early withdrawal penalty plus a big tax bill. No thank you!
Check Your Other Options
To me, an IRA is a smart and simple way to get started, but there are a couple of other ways to save depending on your circumstances:
- If you’re self-employedSEP and SIMPLE IRAs and Individual 401s offer sole proprietors and small business owners a way to increase the amount of money they can contribute to retirement each year. Each is relatively easy to set up, has higher contribution limits, and offers a lot of flexibility.
- If you have a high-deductible health planIf your health plan has a high annual deductible , you may qualify for a Health Savings Account . Similar to an IRA, an HSA lets you make annual contributions and offers significant tax perks. It’s a way to save for current healthcare costs as well as for the future and can be a great complement to an IRA.
- If your state offers an auto-IRASeveral states have recently implemented retirement programs to help workers save, including auto-IRAs, retirement marketplaces, and multi-employer plans. Auto-IRAs require employers who don’t offer retirement plans to automatically enroll their employees in a Roth IRA and deduct contributions directly from their paychecks, similar to a 401. Workers can decide to opt out once enrolled. Some programs are entirely voluntary for workers. Check to see what type of retirement savings program your state may offer if you don’t have one at work.
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Launch A Profitable Side Hustle And Open A Solo 401 Or Sep Ira
If you really don’t want to save for retirement without a 401, then you could open your own. You’d have to start a side hustle and establish a solo 401 orSimplified Employee Pension IRA. What’s nice about these accounts is that they have very high contribution limits. In 2021, you can contribute up to $58,000 to a SEP IRA or solo 401. If you’re 50 or older, then you can add an additional $6,500 to the solo 401 limit. There are caveats, though:
- contributions cannot exceed 25% of your income from the business.
- With a solo 401, you can contribute as both the employee and employer. This distinction is important because the contribution rules for each role are different. As an employee of the business, you can contribute up to $19,500 of your compensation. As the employer, you can contribute up to 25% of earned income. Earned income equals your net earnings from self-employment less one-half of the sum of your self-employment tax and contributions to yourself. The contribution cap for a solo 401 applies to the total of the combined employee and employer contributions.
The broader takeaway is that your business must be profitable to make contributions to these accounts. You can’t, for example, get a business license for a hobby, open a solo 401, and then contribute money from your day job.
