What to Do When You Don't Have a 401(k)

Updated: Oct 29

Retirement planning tips for when your employer doesn't offer a 401(k), 403(b) or 457 employer-sponsored retirement savings plan



No employer-sponsored 401K 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), 403(b) or 457 retirement savings plan leaving them wondering how they’re supposed to save for retirement.


Believe it or not, this situation is pretty common for workers all over the U.S. More than 33 percent of Americans don't have access to an employer sponsored retirement plan. Small business employees, freelancers, etc.—there are many different types of jobs where individuals miss out on 401(k) benefits.


Do you happen to be one of them? Well, fear not! Because although your job may not offer an employer-sponsored retirement plan, there are still several methods you can use to start saving money for retirement.


But before we get to the good stuff, first you should figure out just how much money you should be saving for your retirement. That way, you can level-set you expectations for how much you actually need when you retire, to help you plan for retirement accordingly.


What’s a traditional employer-sponsored 401(k)?


Before we talk through the many options of retirement savings accounts and ways to save for retirement, let’s start with the basic, most recognized retirement savings plan: an employer-sponsored 401(k), 403(b) or 457 retirement savings plan.


These plans are well-loved retirement savings vehicle that can simplify saving and investing through automatic responses, taking the onus and ongoing responsibilities from you. Things like automatic enrollment, automatic pre-tax paycheck deductions, and even target date funds that act like automatic investment strategies will help you to set your retirement savings plan up so it works with little maintenance.


Contributions (i.e., paycheck deductions) can lower taxes, and oftentimes act as free money as many employers match the amount you save. Because employer-sponsored retirement savings plans 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 fans of retirement savings—including us!


But, not all employers offer employer-sourced retirement plans. In that case, you have options!



Consider a Traditional IRA

A traditional independent retirement account like an IRA allows you to make a contribution to your retirement savings and 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 your contribution, if you are within the contribution and income limits; if so, the growth on these funds is tax deferred until you pull the funds out once you retire.


One benefit of any IRA account is that they generally provide more investment options within the account than a 401(k). (Just be sure to take your time before choosing where to invest your money.)



Consider a Roth IRA


We love the Roth IRA, especially for young, new folks saving for retirement. Contributions to a Roth IRA are taxed when you make that contribution into your Roth IRA account but are not taxed when the funds are distributed. The thinking here is that you’re likely in a lower tax bracket now than you will be in the future; so, it’s better to pay (lower) taxes on your retirement funds now, instead of later when your taxes will be higher.


The beauty of a Roth IRA is that you do not pay taxes on the growth of your funds, as long as you follow the Roth withdrawal rules. This tax free growth can be significant and compound exponentially over the years.


However, there are some pitfalls to a Roth IRA. The 2021 Roth contribution limit is $6,000 annually—or $7,000 annually for individuals over the age of 50. And, due to the fact that Roth eligibility is based on peoples' income and tax filing status, those with higher incomes are usually ineligible to contribute to a Roth account.



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.



Consider an individual 401(k)


If you’re self-employed with no employees, this could be a good option for you. 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. In this account you can make contributions as both the employee and employer! As the employee, you can contribute up to $19,500 to your account; whereas, as the employer, you can contribute up to 25 percent of your earned annual income.



Consider a SEP IRA


If you’re self-employed without any employees, this could be a good option for you. Less complex than an individual 401(k), this option features tax-deductible contributions, but is limited to 20 percent of your income if you are self-employed (25 percent if you are running a business).


NOTE: Your business must be profitable in order for this to be a feasible way for you to save for your retirement. Talk to a CPA who can provide deeper insight into the right plan for you.



Consider a SIMPLE IRA


If you're self-employed with employees, this could be a good option for you. A SIMPLE IRA requires the business owner to offer up to a 3 percent match to all participating employees each year, with a tax-deductible contribution limit of $13,500 a year (the limit is higher for folks age 50 and older). Heads-up, there’s typically a fee associated with SIMPLE IRAs.



Consider a SEP IRA


If you're self-employed with employees, this could be a good option for you. A SEP IRA features tax-deductible contributions limited to 25 percent of your income. Another heads-up, if you make contributions for yourself, you must also make them for your employees in the same percentage you contribute for yourself.

How often should you check your retirement savings plans?


Regardless of the plan you choose, whether a Roth IRA, SEP IRA, traditional 401(k) or saving under your mattress (we DON’T recommend saving under your mattress, by the way…), you’ll need to check in on your retirement savings plans.


Just because you set it, doesn’t mean you can forget it! It’s important to check up on your retirement plan every few quarters. Our main goal is to ensure that you’re maxing out your retirement accounts. If you have an employer-sponsored retirement plan, and your employer contributes to your retirement savings, make sure you’re investing as much as you can to meet your employer’s match.


If you don’t have an employer-sponsored retirement plan, it’s still important to keep tabs on your retirement savings accounts. We recommend you try to save 15 percent of your income, if you can, to your retirement. Checking in on your plan over time will help you to work toward that goal, if you haven’t reached it already.

Final tips for retirement savings


Contrary to what your friends, colleagues or relatives may tell you, you’re not s#$t out of luck if you don’t have a traditional employer-sponsored 401(k), 403(b) or 457 retirement savings plan 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.


Remember: while your retirement fund helps you save for your future, you should also be sure to have savings set aside for the unexpected with an emergency fund. You never know what life will throw in your direction. Having savings in both of these funds will help ensure your financial security. So if you haven't opened up an emergency fund yet we recommend doing so ASAP!



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