4 min read If your friends and family all talk about how well their 401(k)s are doing and you don’t have one, it can be a lonely feeling.
A 401(k) is a popular tool that many people use to save and invest for retirement. These employer-sponsored retirement plans offer many advantages when you’re saving for retirement, including the ability to make pretax contributions automatically from your paycheck and let your investment earnings grow tax free until retirement. In some cases, your employer might even match your contributions, which can sometimes be an incentive to save more.
But what if you’re self-employed, or among the tens of millions of American workers whose employer doesn’t offer a 401(k)?
Not to worry. There are several alternatives that can help you save for retirement. Creating your own retirement plan may take a little more effort and discipline on your part, but if you don’t have a 401(k) from your employer, here are some choices to think about. Individual Retirement Accounts (IRA)
An individual retirement account (IRA) might be worth considering if you don’t have 401(k) access. Similar to a 401(k), IRAs offer various tax advantages. Depending on the type of IRA you choose, you may not have to pay income taxes on your IRA contributions until you withdraw the money, usually at retirement. In 2021, you can contribute $6,000 annually to an IRA ($7,000 if you’re 50 or older).
You have a few different IRAs to choose from, depending on your income and employment status. You’ll need to decide which type of IRA works best for you before opening an account . Once you decide which IRA is right for you, it’s easy to open one at a bank or investment company, in person or online. Depending on the amount you plan to contribute initially, you may want to find one that has a low account opening minimum.
Traditional IRA: A traditional IRA works like a 401(k)- your contributions are made with pre-tax dollars and are not taxed as long as the money stays in the account. Distributions are taxable and may be subject to a 10% penalty if you withdraw your savings before age 59 1/2. Your contributions may also be tax deductible if you meet certain criteria.
Roth IRA: You don’t get any up-front tax savings with a Roth, but your investment grows tax deferred, and withdrawals after age 59 1/2 aren’t taxed, either. If you think you might be in a higher tax bracket at retirement, it may be beneficial to contribute to a Roth and be able to pull the money out tax free later.
Roth IRAs offer an additional benefit that 401(k)s don’t: Because you contribute to a Roth IRA with after-tax dollars, you can withdraw that money at any time without paying a penalty. You’re only penalized if you withdraw investment earnings before age 59 1/2 and/or you’ve held the account for less than five years.
Keep in mind, your ability to contribute to a Roth IRA depends on your income and tax filing status. In 2021, you can contribute up to the maximum annual limits if you’re married filing jointly and your modified adjusted gross income is less than $208,000, or less than $140,000 for single filers. A Roth IRA can be a good savings choice for those who fall within the income limits and don’t need the up-front tax break.
Simplified Employee Pension (SEP) IRA: If you’re self-employed, own a business, or have income from a side hustle, a SEP IRA may be a viable way to set aside money for retirement. A SEP IRA is subject to the same investment and withdrawal rules as a traditional IRA. However, you can contribute much more than the $6,000 limit (for those under 50). In 2021, you can save up to $58,000 or 25% of your eligible business income, whichever is less, in a SEP IRA.
SIMPLE (Savings Incentive Match Plan for Employees) IRA: A SIMPLE IRA is another retirement savings account that’s typically offered for employees of small businesses. Like a 401(k), a SIMPLE IRA lets you save pretax dollars up to $13,500 (or $16,500 for those 50 and over) in 2021. Your employer can also make matching contributions on your behalf, dollar-for-dollar, up to 3% of your pay (as long as you also contribute at least 3%), or up to 2% of your pay if you don’t contribute (up to maximum annual earnings of $290,000 in 2021). In order to offer a SIMPLE IRA, an employer must have 100 or fewer […]
source No 401(k)? No Problem. Other Ways to Consider Saving for Retirement