How Do I Save for Retirement If My Employer Doesn't Offer a 401(k)?

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One of the most common pieces of financial advice is to start saving for retirement as soon as you start working. But that’s not always a given for everyone.

Some jobs have a waiting period of six months or a year before you can start contributing to the 401(k) it offers. And smaller companies or startups may not offer a retirement plan at all. If you are an independent contractor or self-employed, you are responsible for your own benefits, and you may be wondering how to start saving for retirement.

Consider an IRA

An IRA is the best option if your employer does not offer retirement benefits. This can be set up with most brokerages, and some banks. You can choose the type of investments that you want to make and you may ask a financial adviser to help you determine the best options for you. Many brokerage firms are willing to waive the initial investment amount if you set up an IRA with a monthly contribution amount. You may also consider a robo-advisor that will manage an IRA for you.

The contribution limit for IRAs for 2018 is $5,500 annually, and $6,500 for those 50 and older. If this is too much for you (the former breaks down to $458/month), don’t get discouraged. You can work to increase this amount each year until you can contribute the maximum.

You also have the option of choosing a traditional IRA or a Roth IRA. With a traditional IRA, your contributions to grow tax-free and you pay taxes when you take the money out in retirement.

With a Roth IRA, your contributions are not tax deductible (i.e., they are made with after-tax dollars) but you are not taxed on the money and their earnings when you take it out for retirement. However, you are only eligible to contribute to a Roth IRA if you make less than $120,000 if you’re single and  $189,000 if you’re married and file your taxes jointly.

While both Roth and traditional IRAs are great investment vehicles, generally a Roth IRA is a better choice (assuming you fall under the earning cap) if you expect to be in a higher tax bracket when you retire. A traditional IRA is a better choice if you expect to be a lower tax bracket when you retire.

Self- Employment Options

If you are self-employed or an independent contractor, you have additional retirement options. You can enroll in a SEP IRA or a solo 401(k) plan.

A SEP IRA is also a tax-advantaged retirement savings tool, in which your pre-tax money is invested tax-deferred until you take it out at retirement. A major benefit of a SEP IRA are the high contribution limits, which were $54,000 in 2017, not to exceed 25% of your income. Another retirement savings tool you may consider is a solo 401(k) plan.

Remember, it’s a good idea to talk to your accountant about the best options for your retirement savings so that you can take advantage of as many tax breaks as possible while you are saving for retirement.

Consider Switching Jobs

When you first start working, you may be willing to go without some benefits to gain experience or because you really believe in a company. Some startups may not have retirement plans in the first few years but plan to offer them after that.

If you are working at a smaller company or startup and have been for a few years with no change in retirement benefits, you may want to consider switching jobs to a more established company to make the most out of your retirement savings and gain other valuable benefits.

Investing for Retirement Outside of Retirement Accounts

Just because you reach your maximum allowed contributions, it does not mean that you have to stop contributing to retirement. You can save for retirement with traditional investments without it being in an official retirement account.

In fact, if you are planning on retiring early, you will want to have a good portion of your retirement benefits in separate accounts so that you can access the money without receiving an early withdrawal penalty. You are not allowed to take money out from either an IRA or a 401(k) until you are 59½ without a 10% penalty.

But you may want to retire earlier than that, or even take on early retirement if it’s financially feasible for you to do so. If you have other investments, you can withdraw money from there until you reach age 59 ½ to avoid those penalties.

Take Advantage of Other Benefits

If you are working for a startup, they may offer other options, like buying stock options instead of a retirement account. This can allow you to benefit from the growth of the company in the first few years. This is a good option when managed correctly.

You should make sure your portfolio is extremely diversified, especially since owning this type of stock is riskier, as it’s a startup and could fold unexpectedly.

There are also rules about how soon you can sell your stock after purchasing, which vary by company, so this should not be your entire retirement plan.

Updated by Rachel Morgan Cautero.