No 401(k)? No Problem. 5 Ways to Save for Retirement.
Saving for retirement can be daunting, so it's no surprise that employer-sponsored retirement plans can be a key stepping-stone into the world of investing—and through your investments, to a healthy retirement nest egg.
retirement plans are fantastic
tools to help people save for
retirement, there are plenty
of options for those who
don't have access to one."
While that's great for those with access to an employer-sponsored plan, such as a 401(k), 403(b) or 457 plan, those without access to plan at work may find themselves struggling to figure out where to begin saving for their futures.
And that's particularly true for millennials. About 77 percent of non-investing millennials are employed full-time, but don't have access to an employer-sponsored plan, or are not employed full-time, according to a recent study by the FINRA Investor Education Foundation and the CFA Institute. That compares to just 22 percent of millennials currently investing with retirement-only accounts.
The thing is, the lack of access to an employer-sponsored plan or to full-time employment doesn't mean you can't save for retirement. In fact, saving for the future can be one of the best ways to use your money, no matter your current employment status.
"While employer-sponsored retirement plans are fantastic tools to help people save for retirement, there are plenty of options for those who don't have access to one," said Gerri Walsh, President of the FINRA Foundation.
Here's a look at your options:
Traditional or Roth IRA
Regardless of where you work, you can save through individual retirement accounts, or IRAs, which allow you to make tax-advantaged contributions to save for retirement. You can set up an IRA through a financial services company, such as a bank, brokerage firm or insurance company. IRA account holders can choose how to invest their retirement funds (mutual funds, exchange-traded funds, stocks, bonds and more). The two primary types of IRAs are the traditional IRA and the Roth IRA.
In a traditional IRA, if you aren't eligible for a retirement plan at work, you can fully deduct your IRA contributions (up to $5,500 in 2018, or $6,500 if you are 50 or older) from your taxable income. The earnings on the investments in a traditional IRA account also grow tax-deferred. That means you'll only face taxes on earnings when you withdraw money from your traditional IRA account in retirement.
While contributions to a Roth IRA are not deductible from your taxable income, money in Roth IRA accounts grows tax-free. That means you generally don't pay taxes when you withdraw the money in retirement. This makes a Roth IRA a good choice for those who think they will be in the same or a higher tax bracket when they retire. Those with incomes exceeding a certain threshold are not allowed to contribute to Roth IRAs.
For more details on phase-out limits and restrictions around withdrawals and contributions, check out What You Need to Know About IRAs.
Self-employed? Then a Solo 401(k) might be for you. Solo 401(k)s allow individuals to contribute to 401(k) plans in two capacities: as the employee and as the employer. That allows most individuals to make higher contributions than they could through other self-employed retirement plans. And, like other employer-sponsored 401(k) plans, you can choose to make it either a Roth plan or a traditional plan.
There are a couple of drawbacks to solo 401(k)s. For example, setting them up takes a little longer than it does with other plans. While other self-employed retirement plans can be opened with just an online application, solo 401(k)s usually require a few extra steps.
There's also a bit of deadline pressure. To contribute for a given year, you must open the plan during that calendar year, though contributions to the plan can be made as late as your tax return due date in the following year. For instance, if you want to make a 2018 contribution to a solo 401(k), you must establish your plan by Dec. 31, 2018, but you can continue to contribute until April 15, 2019 (or Oct. 15 if you are filing for an extension.)
SEP IRAs and SIMPLE IRAs
For the self-employed, you have two other IRA options. SEP IRAs (Simplified Employee Pension IRAs) and SIMPLE IRAs (Savings Incentive Match Plan for Employers) follow the same rules as traditional IRAs but feature higher contribution limits.
For SEP IRAs, you can contribute up to 25 percent of your net earnings from self-employment or $53,000 — whichever is lower. For SIMPLE IRAs, as with solo 401(k)s, you can contribute both as an employee and an employer. However, the contribution limits are lower than those of solo 401(k)s.
Unlike solo 401(k)s, SEP IRAs and SIMPLE IRAs do not feature Roth plans, but one advantage is that they generally take less time to establish and, as the latter plan's name suggests, they are indeed simpler. In addition, SEP IRAs feature later deadlines than solo 401(k)s—you can wait until your tax return due date in 2019 to open (and contribute to) a SEP IRA plan that counts toward the 2018 tax year.
For SIMPLE IRAs, the deadline for establishing a plan is Oct. 1 of the calendar year for which you wish to contribute. Employee contributions can be made up until Jan. 30, of the following year, while employer contributions can be made until the tax return due date of the following year.
If you are ready to start saving for retirement, but don't have an employer-sponsored plan to help you on your way, consider these alternatives, and you will be one step closer to achieving your financial goals.
"What is most important is that people choose the appropriate plan that is available to them and make a commitment to investing toward their future," the FINRA Foundation's Walsh said.
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