Retiring Without a 401(k)

When Your Employer Doesn't Offer a Retirement Plan

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Since its beginning in 1978, 401(k) plans have become the most popular type of employer-sponsored retirement plan in the U.S. According to data from the Bureau of Labor Statistics,, roughly half of all workers have access to a retirement plan through their employer.

What that means, however, is that a significant number of workers don't have the opportunity to include a 401(k) in their retirement planning strategy. In turn, that means they're missing out on these valuable benefits:

  • Contributions to your 401(k) are made “pre-tax,” which means they are deducted from your taxable income for that year.
  • These savings grow tax-deferred 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 401(k) 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 401(k) magic and it’s a good idea to do so. Here’s what you can do:

Open an IRA

An individual retirement account or IRA is an alternative way to save and invest for retirement. For 2020 and 2021, you can contribute up to $6,000 to a traditional or Roth IRA, which increases to $7,000 if you're aged 50 or older.

Up to certain income levels, traditional IRAs allow for tax-deductible contributions. That could be valuable to you if you're in a higher tax bracket and want to reduce your taxable income for the year. A Roth IRA doesn't offer tax-deductible contributions but you do get something else: the ability to make qualified withdrawals in retirement 100% tax-free.

Withdrawing money from a traditional IRA prior to age 59.5 can trigger a 10% early withdrawal tax penalty and you'll owe income tax on the amount withdrawn.

If you're self-employed, consider setting up a SEP IRA. A freelance or contract employee who gets paid on a Form 1099 can contribute up to 25% of net earnings from self-employment to a SEP IRA each year, with a maximum contribution of $57,000 allowed for 2020 and $58,000 for 2021. In terms of taxation, SEP IRAs follow the same tax rules as traditional IRAs, meaning contributions may be deductible but you'll owe income tax on withdrawals.

You can 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.

Set up automatic deposits to your IRA monthly. This way, you don't have to worry about missing a contribution and your investments can grow through the powers of compounding interest and dollar-cost averaging.

Invest in a Health Savings Account (HSA)

Health Savings Accounts are tax-advantaged savings accounts that are linked to high deductible health plans. If you have a high deductible health plan at work or you pay for one as a self-employed business owner, you may be able to use an HSA to your advantage.

While HSAs are not specifically designed for retirement, they offer three valuable tax benefits:

  • Tax-deductible contributions.
  • Tax-free withdrawals for qualified medical expenses.
  • Tax-deferred growth.

The advantage of including an HSA in your retirement strategy is that this can essentially be tax-free money you can use to pay for health care as you get older. That can help you avoid having to tap into other retirement streams of income to cover medical costs.

Plus, once you turn 65 you can withdraw money from an HSA for any reason, whether it's for healthcare-related spending or not, without a penalty. For 2020, you can contribute $3,550 to an HSA if you have individual coverage or $7,100 for family coverage. For 2021, you can contribute $3,600 if you have individual coverage and $7,200 on a family plan.

While you won't face a tax penalty for non-healthcare withdrawals from an HSA after age 65, you'll still owe ordinary income tax.

Open a Taxable Brokerage Account

Once you’ve reached the annual maximum contribution for your IRA and you've fully funded an HSA, you can 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. Tax-loss harvesting, for example, allows you to sell off losing stocks to offset capital gains in your portfolio.

When opening a taxable brokerage account, pay attention to the minimum amount required to invest and the various fees associated with keeping your investments there. Fees can take a big bite out of your investment earnings over time, so it may be helpful to look for cost-efficient investment options, such as exchange-traded funds (ETFs).

And lastly: Convince your employer to set up a 401(k) plan. Offering a 401(k) is a proven way to reduce turnover, help recruitment, and improve employee morale. It’s also not expensive nor overly difficult to manage. If your employer shows interest in setting up a 401(k), volunteer to do the preparation and present her with various options. It will pay off in the long term.

When pitching the idea of a 401(k) 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 401(k) 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.