Retiring Without a 401(k)

When Your Employer Doesn't Offer a Retirement Plan

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The most popular type of employer-sponsored retirement plan in the U.S. is the 401(k) plan. It was first introduced in 1978.

According to data from the Bureau of Labor Statistics, over half of all workers have access to a retirement plan through their employer. This means that a significant number of workers don't have the opportunity to include a 401(k) in their retirement planning strategy.

Benefits of a 401(k)

You'll miss out on some valuable benefits if you don't have the option of investing in a 401(k). Contributions to your 401(k) are made “pre-tax.” They're deducted from your taxable income for that year. These savings grow tax-deferred until you withdraw them sometime after you turn age 59½.

It's “forced” savings. Contributions are automatically deducted from your paychecks. Some employers even match a portion of your contributions. This is essentially "free" money.

It may take more discipline and self-restraint if your employer doesn’t offer a 401(k), or if you're an independent contractor and therefore not authorized to participate. But it is possible to recreate some of that 401(k) magic, and it’s a good idea to do so.

Open an IRA Instead

An individual retirement account (IRA) is an alternative way to save and invest for retirement. You can contribute up to $6,000 to a traditional or Roth IRA in 2021 and 2022. This increases to $7,000 if you're age 50 or older.

Traditional IRAs allow for tax-deductible contributions up to certain income levels. This can 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 get something else from this type of plan: the ability to make qualified withdrawals in retirement 100% tax-free.

Withdrawing money from a traditional IRA prior to age 59½ can trigger a 10% early withdrawal tax penalty. You'll also owe income tax on the amount withdrawn.

Consider setting up a SEP IRA if you're self-employed. A freelance or contract employee can contribute up to 25% of net earnings from self-employment to a SEP IRA each year, with a maximum contribution of $58,000 for 2021. This increases to $61,000 in 2022. SEP IRAs follow the same tax rules as traditional IRAs. Contributions may be deductible, but you'll owe income tax on withdrawals.

You can open a tax-deferred account with a brokerage firm. Fees and investment options for your contributions vary widely, so be sure to do your research and understand what those fees are paying for.

Set up monthly automatic deposits to your IRA so you won't have to worry about missing a contribution. 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 accounts that are linked to high-deductible health plans. You may be able to use an HSA to your advantage if you have a high deductible health plan at work, or if you pay for one as a self-employed business owner.

HSAs aren't specifically designed for retirement, but 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 that you can use to pay for health care as you get older. It can help you avoid having to tap into other retirement streams of income to cover medical costs.

You can withdraw money from an HSA without penalty for any reason when you reach age 65, whether it's for healthcare-related spending or something else. You can contribute $3,650 to an HSA if you have individual coverage in 2022, or $7,300 for family coverage.

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

Open a Taxable Brokerage Account

You can put your money in a regular investment account where you'll accumulate stocks, mutual funds, and bonds after you’ve reached the annual maximum contribution for your IRA and after you've fully funded an HSA. These accounts aren't tax-deferred, but there are ways to minimize these taxes. Tax loss harvesting allows you to sell off losing stocks to offset capital gains in your portfolio.

Pay attention to the minimum amount required to invest when you're opening a taxable brokerage account, and make sure you understand 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).

The Bottom Line

Try to convince your employer to set up a 401(k) plan. It's a proven way to reduce turnover, it helps recruitment, and it improves employee morale. It’s also not expensive, nor is it overly difficult to manage. Volunteer to do the preparation and present your employer with various options if they show interest in setting up a 401(k). It will pay off in the long term.

Get your fellow coworkers 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.

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