Retiring Without a 401k
When Your Employer Doesn't Offer a Retirement Plan
Since it’s beginning in 1978, 401k plans have become the most popular type of employer-sponsored retirement plan in the U.S.
Yet, millions of American workers don’t have access to these plans. In fact, according to a study in March 2016 by the U.S. Bureau of Labor Statistics (BLS), 67 percent of full-time American workers have access to employer-sponsored defined contribution plans and only 48 percent actively participate in these plans.
This still leaves a significant percentage of Americans without access to a 401k plan that need to find alternative ways to save for retirement.
So what makes a 401k plan worth it? This savings channel is tax-deferred and an easily accessible way for employees to accumulate wealth over time for retirement. If you weren’t aware already, participation in a 401k plan allows several benefits.
- Contributions to your 401k are made “pre-tax,” which means they are deducted from your taxable income for that year.
- These savings grow untaxed until you withdraw them sometime after you turn 59.5 years old.
- It is “forced” savings meaning contributions are automatically deducted from your paycheck.
- Some employers even match a portion of your contribution. (Essentially, free money.)
If your employer doesn’t offer a 401k or you’re an independent contractor and thus not authorized to participate, it may take more discipline and self-restraint but it is possible to recreate some of that 401k magic and it’s a good idea to do so. Here’s what you can do:
Open an IRA
An IRA lets you save up to $5,500 per year tax-deferred. Like a 401k, your contributions lower your taxable income and grow tax-free until you start pulling out the money. The contribution limit increases to $6,500 per year if you are over 50 and married couples can double the allowed maximum, even if one spouse is unemployed.
Roth IRAs are taxed differently but could be a good option to consider depending on your situation. With the Roth, you give up the upfront tax deduction but your withdrawals are tax-free. The contribution limits are the same as for a traditional IRA.
If you are self-employed, consider setting up a SEP IRA. A freelance or contract employee who gets paid on a 1099 can contribute up to 20 percent of their annual compensation to a SEP, subject to various rules and guidelines.
You’ll need to open your tax-deferred account with a brokerage firm. Fees and investment options for your contribution vary widely, so be sure to do your research and know what the fees are paying for.
If you do take the IRA route consider supplementing this account with other retirement strategies. For example, many employers offer matching contributions for their 401(k) plans, which is essentially free retirement money for the worker. IRAs can’t include this matching contribution because it is an individual account thus not tied to any employer. You can never be sure of what the future holds so it is always a good idea to have an additional route for savings.
Make Direct Deposits
This step ensures you “pay yourself first” as you do when enrolled in a 401k. See if your employer can direct part of your payroll deposit into your IRA or another investment account. If not, set-up an auto-deduction from your checking account so the contribution lands straight in your retirement fund on payday.
Open a Taxable Brokerage Account
Once you’ve reached the annual maximum contribution for your IRA, put your money in a regular investment account where you will accumulate stocks, mutual funds, bonds, et cetera. While these accounts are not tax-deferred there are ways to minimize these taxes.
And lastly: Convince your employer to set-up a 401k plan. Offering a 401k is a proven way to reduce turnover, help recruitment and motivate employee morale. It’s also not expensive nor overly difficult to manage. If your employer shows interest in setting up a 401k, volunteer to do the preparation and present her with various options. It will pay off for the long-term.
When pitching the idea of a 401k get your fellow co-workers on board and start with the person who handles these benefits such as the benefits administrator in human resources. Selling a 401k is like selling any product so make sure you know the benefits and how it will make life better for the company and its employees.