Here are your investment options to prepare for retirement if you don’t have access to an employer-sponsored 401(k).
Over the past 40 years, 401(k) plan has become the most popular type of retirement plan offered by private employers. As of September 2021, there are $7.3 trillion in assets held in 401(k) plans and approximately 60 million active participants, According to Investment Company Institute.
Yet even in such a progressive landscape, many Americans still do not have this type of employer-sponsored insurance. retirement savings account. But that doesn’t mean you should give up retirement savings altogether. There are other ways to save money to make sure you’re prepared for the future.
Many Americans still don’t have a 401(k) plan.
About half of American households have access to a work-based retirement plan, according to a report from the Stanford Center for Longevity. There are many reasons for this. Apart from the fact that there are now there is no legal requirement Since employers offer retirement benefits, such as 401(k) plans, many Americans do not have access to these plans because they are self-employed or are regular employees. copper.
If you are in this situation, the good news is that there are other options. While funding your own retirement can be challenging, it’s important to save money for the future and start doing so as soon as possible so you can spend time with yourself—and benefit from it. position of compounding years of savings.
“When it comes to retirement savings, there are plenty of savings vehicles available to individuals without an employer-sponsored plan, the self-employed, or even those looking to save outside of a traditional plan. system. Employer-sponsored 401(k),” said Sri Reddy, senior vice president of retirement and income solutions at Principal.
4 investment options to prepare for retirement
Some of the most popular account options include traditional or Roth individual retirement accounts (IRAs), brokerage accounts, SEP IRAs, or even Solo 401(k). Each account type has advantages and disadvantages that will vary depending on your unique financial situation and needs.
1. IRA account
The name tell everythings, IRA not tied to the employer. They are self-funded retirement investment accounts that offer tax-advantaged status, which we will explain below. The most popular options are the traditional or Roth IRA.
A traditional IRA helps you build retirement by allowing the account holder to make tax-deductible contributions. “You can deduct IRA contributions from your taxes in the year you contributed, which reduces your taxable income,” Reddy explains.
Funds in this type of account are also tax-deferred and are not taxed until you withdraw them. Once you start using your traditional IRA funds, distributions will be taxed based on your income bracket at that time. You can start withdrawing without penalty at age 59.
With a Roth IRA, you pay taxes on contributions now, which can offer a number of benefits. For example, because you already paid tax on this amount, the distribution will be tax-free. But that’s not the only benefit. “Contributions can be distributed at any time because you’ve already paid taxes on those dollars,” said Katherine Tierney, senior retirement strategist at Edward Jones.
However, if you receive your distribution too early—before 59—you may be subject to taxes and penalties. This is also the case if you start withdrawing from a Roth that has been open for less than five years.
However, there are some distinct differences when using Roth to prepare for retirement. Most importantly, there are income limits for those who qualify for Roth. For 2023, your income must be less than $228,000 for a married couple and $153,000 if you’re single to be able to use a Roth IRA. according to the IRS.
Whether using a traditional or a Roth IRA, it’s important to understand one of the main downsides of this type of account: low annual contribution limits. The maximum annual contribution limit for 2023 is $6,500 for individuals under age 50 or $7,500 if you’re age 50 or older. according to the IRS.
2. Traditional taxable investment accounts
Often referred to as a brokerage account, a taxable investment account can also be an option for saving money in retirement when you don’t have access to a 401(k). Using a brokerage account allows you to raise money for retirement by put together an asset portfolio. This may include share, bondsand mutual funds.
There are many benefits to using a Traditional investment account to save for retirement includes the ability to choose any asset class you want. Additionally, there are no income limits when opening a brokerage account—which means that unlike Roth IRAs, they are available to anyone, regardless of your annual income.
“While brokerage firms have limited tax benefits, they have some advantages in that they offer fewer restrictions and more flexibility than vehicles like IRAs,” says Reddy. “With a brokerage account, you can withdraw your money at any time without any tax or penalty. This liquidity is one of the best reasons an investor might be interested in holding assets in a brokerage. What’s more, if you’ve maxed out other non-taxable contributions, such as an IRA, a taxable investment account like a brokerage will allow you to save even more without limits.”
3. SEPTEMBER IRA
For those who are business owners, self-employed, freelancers or contract workers, the Simplified Employee Retirement IRA plan (SEP) is another option.
“SEP IRA plans offer many benefits,” says Tierney. “They are relatively simple and inexpensive, require no special IRS filing or management, are tax deductible for employers, and annual contributions to the plan are optional.”
SEP IRAs generally follow the same investment and distribution rules as traditional IRAs. This means that income is tax-deferred and distributions are taxed as ordinary income. In addition, distribution can be made at any time. However, there is a 10% penalty on pre-tax dollars if you withdraw before age 59 and you do not qualify for any penalty exceptions.
In general, individuals must begin receiving a required minimum distribution (RMD) from their plan the year they turn 72 and each year thereafter, Tierney adds. “For SEP IRAs, there are no exceptions to the RMD rules for individuals who have not yet retired.”
4. Single 401(k)
Finally, a single-participant 401(k), sometimes referred to as a single-participant 401(k), may be worth considering if you run a business that doesn’t include any employees or other sole employees. is your spouse.
A 401(k) alone can be a great option if you don’t plan on hiring other employees and are treating the savings just for yourself, says Reddy. “With these types of plans, you can save up to $22,500 by 2023 when employees defer, with an additional 25% as employer contributions.”
The benefits of this account include contributions you make as an “employer” that are tax-deductible to your business and increased income that is tax-deferred until withdrawal.
Invest for retirement is one of the most important steps you can take to build a healthy financial future. Even if you don’t have an employer-sponsored 401(k) fund, it’s still a good idea to contribute as much as you can personally in retirement and start as soon as possible. There are options for all types of financial needs, and many include tax benefits.
“Given the average life expectancy, your retirement could last anywhere from 25 to 30 years, maybe even longer,” says Tierney. “Social Security can help you meet some of your retirement income needs, but it was never designed to meet all of your income needs. On average, it replaces about 30% to 40% of your pre-retirement income, so it’s important to make sure you’re focusing on what you need to save and invest to meet all your needs. friends in retirement.”