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

Woman reviewing papers next to a laptop in her kitchen.

Kate_Sept2004 / Getty Images

Common financial advice tells you to start saving for retirement as soon as you start working. But that’s not easy for all workers. Some jobs have a waiting period of six months or a year before you can start saving to the 401(k) it offers. Smaller companies or startups may not offer retirement plans at all. You're also responsible for your own benefits if you're an independent contractor or you're self-employed.

You may be wondering how to start saving in these cases.

Think About an IRA

An IRA is a great option if your employer doesn't offer retirement benefits. You can set one up with most brokerages and with some banks, choosing the type of investments you want to make. A financial adviser can help you decide on the best options for you.

Many firms are willing to waive the start-up investment requirement if you set up an IRA with a monthly savings amount. Or consider using a robo-advisor that will manage an IRA for you.

The savings limit for IRAs for tax year 2021 is $6,000 annually. It goes up to $7,000 for those ages 50 and older. Don’t give up if $500 a month seems like too much for your budget to handle. You can work to increase your savings amount each year until you can contribute up to the limit.

You have the option of choosing a Roth IRA or a traditional IRA. Your contributions are tax deductible and the money grows tax-free in a traditional IRA. You pay income taxes when you take the money out in retirement.

Your savings to a Roth IRA aren't tax-deductible. But you won't be taxed on the money and its earnings when you take it out. This can be a huge benefit if you start saving at a young age. But you're only eligible to contribute to a Roth IRA in 2021 if you make less than $140,000 a year if you’re single, or $208,000 if you and your spouse file a joint tax return.

Both Roth and traditional IRAs are great investment options. But a Roth IRA can be a better choice if you expect to be in a higher tax bracket when you stop working. A traditional IRA can be a better choice if you expect to be in a lower tax bracket when you retire.

Self-Employment Options

You can enroll in a SEP IRA or a solo 401(k) plan if you're self-employed or an independent contractor.

SEP IRA is also a tax-advantaged retirement savings tool. Your pre-tax money is invested tax-deferred until you take it out when you stop working. A major benefit of a SEP IRA is the high contribution limit. It's $58,000 in 2021, not to exceed 25% of your income.

Talk to your accountant about the best options for your retirement savings so you can take advantage of as many tax breaks as possible.

Think About Switching Jobs

You may be willing to do without benefits when you start working if your goal is to gain experience, or because you really believe in a company. Some startups may not have retirement plans in the first few years, but they plan to offer them later. But you may want to think about switching jobs to a more established company to make the most out of your savings if you've been there for years with no change in benefits.

Investing Outside of Retirement Accounts

You don't have to stop saving for retirement just because you reach your maximum allowed savings for the year. You can save with other investments. It doesn't have to be an official retirement account.

In fact, you'll want to have a good portion of your benefits in separate accounts if you're planning on retiring early so you can access the money without being hit with an early withdrawal penalty. You aren't allowed to take money from either an IRA or a 401(k) without a 10% penalty until you reach age 59½. But there are a few exceptions.

You may want to retire sooner than that. Other investments will allow you to withdraw money before age 59½ to avoid the penalties.

Take Advantage of Other Benefits

Startups may offer other options, such as 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. It's a good option when it's managed right.

Make sure your portfolio is highly diversified. A startup could fold without warning. Owning this type of stock is riskier.

There are also rules for how soon you can sell your stock after purchasing it so this should not be your whole retirement plan. These rules can vary by company.

Some companies offer deferred compensation programs that allow you to defer pay until some future date, such as when you retire. This option lets you reduce your taxable income now. You'll save money on income taxes, earn interest on the money, then take the money as either a lump sum or over a period of time when you decide you want it.

The rules for participating in such a program, and for how these programs are operated, can be tricky. Consult with a qualified retirement planning specialist before you enroll.