Retirement planning tips for when your employer doesn't offer a 401(k) plan
We recently presented to a group of 20-somethings beginning their first jobs out of college. Many of them were working for startups that didn’t offer a 401(k), leaving them wondering how they’re supposed to save for retirement? ;TLDR; don’t worry, you’re safe!
Let’s start with the traditional employer-sponsored 401(k). It’s a well-loved retirement savings vehicle that can simplify saving and investing through automatic responses - automatic enrollment, automatic pre-tax paycheck deductions k, and even target date funds that act like automatic investment strategies. They’re also valuable. Contributions (i.e., paycheck deductions) can lower taxes, and oftentimes act as free money as many employers match the amount you save. Because 401(k)s offer so many benefits like lower taxes, forced savings, automatic investing and the potential for an employer match, they’re often the first step of saving for retirement. That’s why many people are big 401(k) fans - including us!
But what if you’re one of the 33% of Americans without access to an employer sponsored retirement plan like a 401(k)? You have some options:
If you are employed by a company and they do not offer a 401k (or equivalent retirement plan)
Consider a Traditional IRA: A Traditional IRA allows you to make a contribution, defer income tax on that amount and the growth of these funds until you pull the funds out at retirement. The traditional IRA offers a tax deduction on the contribution if you are within the contribution & income limits and then the growth on these funds is tax deferred until you pull the funds out in retirement.
Consider a Roth IRA: We love the Roth, especially for young, new investors. The Roth contribution is taxed as you use after tax dollars to make the contribution but the beauty is that the growth is not taxed at all, as long as you follow the Roth withdrawal rules. This tax free growth is very very significant and compounds exponentially over the years.
Set up direct deposit. One of the reasons why we love the traditional 401(k) is because contributions are automatically deducted from your paycheck. You can create direct deposit contributions with other plans, too! Contributions to an IRA (Roth or traditional) can be done in one contribution, but we think you should consider automating these in predetermined intervals, like at each paycheck, monthly or quarterly. This way, you can take advantage of buying into the market at different times and prices; and, you don’t have to think about or accidentally skip (!) contributions. Robo platforms make it very easy to schedule regular contributions.
If you are self employed with no employees:
Consider an individual 401(k). Also known as a solo 401(k), this option features. tax-deductible contributions with high limits. Heads-up, individual 401(k)s typically involve more paperwork than a Roth or traditional IRA.
Consider a SEP IRA. Less complex than an individual 401(k), this option features tax-deductible contributions, but are limited to 20% of your income if you are self employed (25% if you are running a business) .
If you're self-employed with employees:
Talk to a CPA who will can provide deeper insight into the right plan for you.
Consider a SIMPLE IRA. This option requires the business owner to offer up to a 3% match to all participating employees each year, with a a tax-deductible contribution limit of $12,500 a year (the limit is higher for folks age 50 and older). Heads-up - here’s typically a fee associated with SIMPLE IRAs
Consider a SEP IRA. This option features tax-deductible contributions limited to 25% of your income. Heads-up - if you make contributions for yourself you must also make them for your employees in the same percentage you contribute for yourself.
Contrary to what your dad might tell you, you’re not s#$t out of luck if you don’t have a traditional 401(k) option with your employer. You have lots of options! As with any related to your investments, choose what works best for you, your lifestyle and your goals.
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