How to Save for Retirement without a 401k: 5 Alternative Ways

Our work’s value is seen in the lives we lead and the ability to secure our future and that of our loved ones through savings and investment. 

Saving for retirement is one of the many financial plans one should set and prioritize. Having these savings ensures you get sufficient funds to maintain your lifestyle later in life.

This article provides 5 alternative ways to save for retirement. It gives a simple outline for both employed and self-employed people to secure their future with a financial plan that does not involve a 401(k).

 

What Is a 401(k) Plan?

A 401(k) is a retirement plan where an employee contributes a certain amount of their salary to savings. Those savings are used once a person attains a certain age after retirement.

With this plan, the employee can decide to contribute an amount or percentage to your account. Other times, the employer is not willing to match up an amount or contribution.

The 401(k) plan is good, and it has its advantages. However, some people run their businesses while others may not understand the need and urgency of having a financial retirement plan.

 

Challenges with a 401(k) plan

Some challenges make this plan unsuitable for some, including: 

  • The limit placed on the maximum amount a person can contribute

  • The tax and regulations or rules set for the withdrawal of money


The plan is not accessible to employers, and some self-employed people do not know how else to save for retirement. There are risks of not learning and implementing other saving ways for retirement. 

Some risks include:

  • Working past the retirement age to sustain your needs - Once you cannot save up for your retirement, it will force you to work longer when you should rest and enjoy what you have worked for over the years.

  • Risk of falling into debt - Different times come with different economic waves. After retirement, the streams of income become dry, and some expenses are recurrent while others come as emergencies. Failure to save up for retirement may force you to borrow money to meet some of these needs.

 

5 Ways to Save for Retirement Without a 401(k)

Let’s look at 5 alternative ways of saving for your retirement without having a 401(k) plan.

 

1. Set up A IRA Account


Setting up individual retirement accounts (IRAs) is one of the best ways to save for retirement without a 401(k) plan. 

An IRA account may include a savings account or a deposit certificate (CD) at a local bank or credit union. IRAs are held by an investment company or a brokerage firm.

There are many benefits that come along with a IRA, such as:

  • Investment Options - 401(k)s are limited in how much control you have over your hard-earned money. The more you have at your disposal the quicker you can build your retirement package. IRAs allow individuals to choose from investment options such as mutual funds, stocks, bonds, exchange-traded funds (ETFs), FDIC insured CDs, or single fund. Having the ability to choose what you want to invest into gives IRA holders more control over how to spend their money.
  • Ownership - Your employer owns a 401(k) plan. It means that you do not have control over your limits, and neither do you have investment options. Also, should you switch jobs or lose your job, it means that you stop contributing to that particular 401(k). With an IRA, it is different. The account is yours to keep. Also, switching from one job to another does not affect or limit your access to your account. An IRA allows you to tailor your portfolio into action based on your risk profile, financial needs, and retirement goals.
  • Flexibility - Although putting funds into your 401(k) is relatively easy, a withdrawal  attracts penalties. The same is true for traditional IRAs. However, with Roth IRAs, you may choose to withdraw your funds before retirement. Such a withdrawal is possible, but it attracts a 10% penalty on earnings before retirement. The exciting part is that there are no additional charges, taxes, or penalties. This offers you more autonomy when you are still debating on contributing to a Roth IRA.

There are several ways in which you can contribute to an IRA account. The only difference is that you are required to pay your taxes. Let us indulge deeper in the different ways.

 

Traditional IRA

A traditional IRA enables you to make contributions from your pre-tax income. It implies that you must have a taxable income to be eligible.

All your earnings are tax-deferred until withdrawal during retirement.

 

Features of a Traditional IRA

  • As of 2020, there is no minimum age restriction to contribute to a IRA. The Secure Act in December 2019 removed the age limit for contributions.

  • This account does not require any minimum amount or investment to open. However, you may require some initial investment capital in some investment options, such as mutual funds.

  • All earnings grow a federal income tax-deferred. You can take distributions from the age of 59 1/2. Any money taken out before then attracts a 10% penalty if no exceptions apply. Some common exceptions depending on brokerage or investment companies include purchasing a first home, college expenses, birth, adoption, medical expenses or health insurance premiums, substantially equal payments, and death or permanent disability.

  • The minimum required distributions (RMDs) starting age is 70 1/2 or 72 years, depending on your birthday.

 

Traditional IRA Contributions

You can make contributions of up to $6000 if you are below 50 years old or up to $7000 if you are 50 years and over. These contributions are also fully tax-deductible if neither you nor your marriage partner has a workplace retirement plan.

Tax deductions are phased out for higher earners in 2021 as below:

  • For single fillers, deductible contributions begin at $66,000.
  • Married people in joint filing having a workplace plan the deductible contributions start at $105,000.
  • For a married joint filler with a single spouse with a workplace plan, the deductible contributions begin at $198,000.

 

Roth IRA

A Roth IRA enables you to grow your investments tax-free on the investment gains, and withdrawals are not subject to withdrawal tax in retirement.

You make contributions to your account with money that you have already paid taxes for, and that is why you receive tax-free benefits at retirement. 

Roth IRAs are more like a savings plan, except that you can make investments using your contributions. 

 

Features of a Roth IRA


According to the Setting Every Community Up for Retirement Enhancement (SECURE) Act of 2019, you must earn an income to contribute to the plan. This rule implies that you cannot contribute more than your earnings. 

In 2021, contributions are capped at $6000 if you are below 50 years old, and up to $7000 if you are above 50 years old. 

There are no RMDs during the lifetime of the original owner. But, people who are 59 1/2 years old or beyond holding their accounts for five years can begin taking their distributions. 

Roth IRA allows you to make contributions at whichever age, unlike other IRAs that do not allow your contributions past 70 1/2 years old. 

In the event of death, your next of kin or heir receives your Roth balances tax-free. Like the traditional IRA, the Roth IRA does not require a minimum investment amount to open an account. 

This investment model allows you to withdraw your initial contributions tax-free. However, it is critical to note that you may be taxed if you withdraw your investment earnings before the retirement period. 

 

Roth IRA Contributions


Roth IRA gives you to autonomy to choose how and when to make your contributions. For instance, you may choose to contribute $6000 at the start of the year or distribute your contributions over many months.

Your Modified Adjusted Gross Income (MAGI) must meet the following set requirements to qualify for a Roth IRA. For married couples filing jointly, the MAGI should be less than $208,000 for maximum contributions. You may pay fewer contributions if the MAGI is between $198,000 up to $208,000.

The MAGI must be less than $140000 for maximum contributions for single people. Otherwise, the IRS reduces MAGI contributions for amounts exceeding $125000 up to $140000.

If you want a withdrawal, that is not the original contribution and your age is below 59 1/2, you shall be subject to a 10% penalty. However, in this case, the amount of money you receive is not subject to taxations. 

Excessive contributions to the annual Roth limit attract penalties from IRS. However, should you realize the mistake before filing your tax return, withdraw the excess contributions and earnings from them. 

If you had already filed, you may remove the excess contributions and accrued gains within six months and file an amended tax return. In both instances, you will have to pay taxes for your earnings with no penalties. 

Setting up a Roth IRA is easy, and within a few days of your first contribution, you should be able to start making investments for retirement.

 

SEP IRA


If you are self-employed, a 401(k) plan is not among your options. However, you may decide to set up a simplified employee pension (SEP) IRA savings plan.

A SEP allows you to make contributions that are tax-deductible and grow tax-deferred investments until retirement. The distribution at old age has a tax levy on them as income.

To be eligible for the SEP plan, you must:

  • Be at least 21 years old.

  • Have worked for an employer for at least three years of the past five years.

  • Have received at least $650 in compensation from your employer during the year.

 

With a SEP-IRA, the employee owns the account and has total control over it. The employers must contribute an equal percentage to the employees as theirs.

The contribution limit for SEP-IRA is currently $58,000 for people below 50 years old. For people over 50 years old, contributions have a set limit of $64,500.


 

2. Set up Direct Deposit

Direct deposit allows your investor to automatically deduct a set amount from your paycheck into your investment account. This method helps to reduce the temptation of using up investment money for other things.

Direct deposit ensures automatic payroll deduction and instant bank withdrawal. Afterward, your investor’s account is credited.

 

3. Save Your Tax Refund


According to the IRS, the average American had a tax refund of $2741 in 2020. Saving your tax refund into a savings account or investment account can help you save for retirement.

You can do this by filling out IRS form 8888 and instruct them to deposit your tax refund directly into a IRA.

 

4. Open a Health Savings Account


A health savings account (HSA) is tax-deductible and allows you to make tax-free withdrawals for your healthcare expenses.

The maximum HSA contributions in 2021 for individuals is $3600, $7200 for family coverage, and $1000 for people aged 55 years and above.

During retirement, you may withdraw your HSA money for other things with no penalty. If you are 65 years ld, you may use your HSA money for any reason, and you will only be required to pay an income tax for the distribution.

 

5. Claim Your Savers Credit


The Savers Credit offers tax breaks to low and moderate-income taxpayers saving for retirement. This credit helps you reduce or completely do away with your tax bill.

You can claim 50%, 20%, or 10% for the initial $2000 during the year for retirement.

 

Conclusion


Having a retirement savings plan is an investment that a person should make as soon as they start earning. 

There are many options to choose from to save for retirement without a 401(k). These options range from saving up tax refunds, saving with IRAs to opening a health savings account.

Do not let the limitation of a 401(k) plan deny you the privilege that comes with retirement savings. Select any of the mentioned alternatives and secure your future.

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