Best Ways to Save For Retirement Without a 401k

No 401k? No problem. Growing a nest egg takes time and money, but there's more than one way to go about it.

For those who qualify, a 401k is a wonderful retirement savings account option. Today, millions of workers rely on them, but they’re not available to everyone. Typically, those who freelance, work part-time, or earn the lowest wages lack access to employment-related retirement plans.

To set your future self up without a 401k, it’s time to start exploring other ways to save for retirement. And you don’t need an employer to do it. You just need to take control of your financial future right now. The good news is, it’s easier than you probably realize.

Here are some of the best ways to save for retirement without a 401k.

Look into Individual Retirement Accounts

notebook with column to compare pros and cons of Roth IRA and a column for traditional ira

While anyone who earns income qualifies to open an IRA (individual retirement account), these retirement accounts aren’t tied to your employment. Unlike 401ks, you’ll have more direct control and more flexibility when it comes to how you invest. Best of all, opening IRAs is officially easier than ever before.

There are two types of IRAs: Traditional and Roth. Both offer great tax breaks, but the benefits, restrictions, and timelines are notably different. Ultimately, choosing the right one comes down to the tax bracket you fall into. Typically, those who plan to be in a higher tax bracket upon retirement should contribute to a Roth IRA. Those who expect themselves to be in a lower tax bracket when they retire would be better off with a traditional IRA.

Think about the difference this way: having a traditional IRA will likely help you save money on your annual tax bill. In contrast, contributing to a Roth IRA can help you save money on taxes once you’ve retired.

What to Know About Traditional IRAs

With a traditional IRA, you’ll have the luxury of worrying about taxes later. You’ll put money into your account as soon as you’re able and reap the benefits of tax-free growth. Taxes won’t come into play until you make your first withdrawal. Once you’ve taken money out, you’ll be required to start paying income taxes. The amount will be determined by your tax bracket.

While early withdrawal (before the age of 59-½) is allowed, it will come with a 10% penalty. However, there are exceptions to this rule. So do your research before making any hasty withdrawals. As of 2022, those with traditional IRAs who are under 50 can contribute up to $6,000 annually. Those 50 or older are allowed to contribute up to $7,000 a year. All withdrawals will be taxed as ordinary income, but contributions are potentially tax-deductible.

happy couple sitting on the couch and discussing finances with piggy bank on the table wearing studious glasses

Perhaps most notably, when it’s time for taxes, any traditional IRA contributions for that year will reduce your taxable income. For those that qualify, your tax bill may be lowered and your refund may increase. First things first, find out if your employer offers a retirement account. Even if you don’t sign up for it, your adjusted gross income has to be under $66,000 (or $105,000 for married couples who jointly file) to qualify for a Traditional IRA tax deduction.

If it turns out that your employer offers no sort of retirement plan, you’ll be able to claim a tax deduction on what you’ve contributed that year no matter how much money you made.

What to Know About Roth IRAs

When compared with Traditional IRAs, the terms for Roth IRAs are basically flip-flopped. Roths don’t allow you to get out of being taxed today, but the good news is, you’ll be able to make tax-free withdrawals in the future. This type of retirement account is built with after-tax money. And so, it grows tax-free.

The benefit of this is that when you go to make withdrawals, you’ll get those grown funds without paying a cent in taxes. But come tax time, you won’t qualify for a tax break. One of the biggest differences between a Traditional IRA and a Roth IRA is that your contributions to this type of account are not deductible.

interstate sign that says retirement with Roth written below in all caps against a blue sky

However, just like Traditional IRAs, you’ll be allowed to contribute up to $6,000 annually or $7,000 if you’re 50 or older. The difference here is that you can withdraw anytime without taxes or penalties. But again, if you fall into a high-income bracket, you won’t qualify for a Roth IRA.

One of the greatest perks of this retirement plan is the freedom to have access to your money whenever you want or need it without consequence. All original contributions can be taken out tax and penalty-free. With that said, you’ll only be able to pull out the money you’ve grown after the account has been open for five years and you’re older than 59 ½.

Start Using Micro Investing Apps

No matter the type you choose, IRAs give you more investment options than 401(k)s. If you’re seriously considering any IRA, start investing sooner rather than later. Those who invest will have the most options and typically, they’ll see the most long-term growth. If you’re unsure where to start, look into micro-investing apps.

Stash and Acorns are two popular, easy-to-use options designed with “investing for beginners” in mind. They function like virtual financial guides, but the power is totally in your hands. They’ll help you set up small, recurring contributions to your IRA. While these convenient services come with subscription fees, it’ll be a small price to pay in the big scheme of things.

Open a Health Savings Accounts

Have you ever thought about opening a health savings account (HSA) to save for retirement? It might sound like an odd choice, but it’s worth consideration, especially for those not planning on a 401k.

As you likely know, HSAs pay for the expenses high-deductible health insurance won’t cover. But did you know that’s not all these accounts are good for? As it turns out, this type of account typically offers excellent tax advantages. In turn, you can use it to start saving with your future financial health in mind.

person putting coins into jar labeled  "hsa" for health savings account

Financial experts often say that HSAs offer “triple tax benefits.” For starters, all contributions are tax-deductible. Secondly, those contributions will grow tax-free. And lastly, distributions will always be tax-free when the money is for qualifying medical expenses.

When you contribute, you’ll save on taxes, the funds will roll over yearly, and you’ll earn a tax break for all contributions you’ve made. All money taken out for qualifying health costs is tax and penalty-free. Once you turn 65, you’ll be free to use the money in your HSA however you see fit.

Unlike traditional savings accounts, the money you invest in an HSA will grow over time. And you can open one even if you’re employer doesn’t offer it. However, you’ll only be able to make contributions if you’re covered by a high-deductible health plan. Last thing worth noting: not all HSAs are created equally. Some offer significantly better benefits and options than others. According to Investopedia, these are the 7 best HSA’s of 2022.

Taxable Investment Accounts

Sometimes called traditional brokerage accounts, taxable investment accounts allow you to put money towards your retirement goals and other long-term goals. The main caveat is that you won’t receive the unique tax breaks that IRAs or 401(k)s offer.

Generally, you’ll pay taxes on all the money going in or coming out, including dividend income. But it might be worth the cost, depending on your future plans.

couple working with broker

Obviously, tax-free money sounds better than taxed money. But don’t dismiss this option too soon. Sometimes, taxable investment accounts make the most sense. For instance, you’ll be able to make penalty-free withdrawals at any time after opening it and at any age. So if you’re saving up to buy a house or reach some other pricy, far-off goal, this type of account could come in handy. Considering it’s all taxed, there’s no cap on how much you can contribute. That’s one big benefit it has over the other retirement-related accounts. For those who’ve already maxed out their IRA or HSA, having another place for endless money to go is potentially a very appealing option.

With this type of account, you can buy and sell investments. That includes stocks, bonds, ETFs, and mutual funds, to name a few. If you’re interested in opening a “TIA”, financial institutions, online brokers, and investment apps will be able to walk you through it.

Self Employed? This Option Was Built For You

If you’re a small business owner or self-employed, retirement savings options are notably limited. That’s one of the main reasons Simplified Employee Pension IRAs exist. Offered by most major brokerage firms, SEP IRAs are incredibly easy to set up. Businesses “with one or more employee” can open one at any time.

Independent contractors, self-employed people, solo entrepreneurs, LLPs, sole proprietorships, C corporations, and S corporations all qualify.

happy female photographer holding camera in modern photo studio

This retirement-oriented account is ideal for freelancers, budding entrepreneurs, and those that prefer temporary gigs to traditional 9-5 jobs. Best of all, SEP IRAs offer significantly higher contribution limits than traditional and Roth IRAs. Currently, those who qualify are allowed to contribute up to 25% of their adjusted net earnings or up to $61,000, depending on which amounts to less. If you’re a solo/small business owner, you have the freedom to add employees to this type of IRA over time. The flexibility of a SEP IRA makes it an attractive option, particularly for those who don’t qualify for typical IRAs.

Here’s the full scoop on how SEP IRAs work, compliments of NerdWallet.

Solo 401ks Are Also an Option

For those self-employed or business owners with no employees, you may want to look into a self-employed 401(k), better known as a solo 401(k). You’ll be able to save as an employee and as an employer. When you contribute as an employee, you can contribute up to 100% of your earnings, and those contributions are tax-deductible. As of this moment, the contribution cap is $20,500 for those under 50 or $27,000 for those 50 and older.

When contributing as an employer, you’ll be able to put 25% of your compensation. But your total contributions (if you’re under 50) can’t exceed $61,000.

retired couple walking down the beach at sunrise and holding hands

If you’re making money on your own or your business consists of only you and your spouse, you’re likely eligible to open a solo 401(k). And it’s worth looking into today. Solo 401ks come with some unique features. When compared with SEP IRAs, you’ll likely be offered higher contribution limits and more sizable tax deductions. But only you can decide which plan suits your long-term needs, goals, and retirement dreams.

The Bottom Line

While they’re certainly hard to beat, you don’t need a 401k to comfortably retire. But without one, you’ll need a solid savings plan that truly works for you. And the earlier you start investing in your retirement, the better.

If you dream of retiring as a millionaire, you’ll undoubtedly get there fastest with a 401k. Still, it’s absolutely possible to retire as a millionaire with other tax-advantaged plans, especially if you act now. Going in, the risks might be higher, but the earnings can be too if you choose your plan wisely. Once you’ve decided which route will best help you reach your retirement goals, it’s time to start saving.

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