Are you about starting a retirement portfolio but don’t want to invest in a 401K? If YES, here are 13 smart tips on how to save for retirement without a 401K.
Since it was established in the 1970’s, 401k plans have been by far the most popular type of employer-sponsored retirement plan in the U.S., but even with its popularity, millions of Americans do not access these plans for one reason or the other.
In fact, according to a study that was done in March 2016 by the United States Bureau of Labor Statistics (BLS), 67 percent of full-time American workers have access to employer-sponsored defined contribution plans and only 48 percent actively participate in these plans. What this means is that a large amount of Americans still do not have access to a 401k plan and as such, they need to find an alternative retirement plan for themselves.
It is not difficult to see why 401k plans are so popular. This savings channel is tax-deferredand it is an easily accessible way for employees to accumulate wealth over time for retirement. Any contribution you make to your 401k plan is task free and this means that they are deducted from your taxable income for that year.
The savings in a 401k thus have freedom to grow untaxed until they are ripe for withdrawal (when you are almost 60 years of age). It is “forced” savings in the sense that the contributions are automatically deducted from your paycheck.
In the event that you work in an environment where a 401k is not being offered or you are an independent employer and as such you do not have the authority to use a 410k plan, it may take more discipline and self-restraint but it is possible to recreate some of that 401k magic and it’s a good idea to do so.
Here are some ways you can save for your retirement without a traditional 401k.
13 Smart Tips on How to Save for Retirement Without a 401K
1. SEP IR: this option can be a good fit for people who are self-employed. A freelance or contract employee who gets paid on a 1099 can contribute up to 20 percent of their annual compensation to a SEP, subject to various rules and guidelines.
You will need to open your tax-deferred account with a brokerage firm. The fees and investment options that are involved here vary greatly and as such, it is advisable to carry out proper research in order to determine the fees you will be paying.
2. The Individual 401k: this is also known as a solo 401k and it is ideal for people who are self-employed and do not have employees working under them. It works for business owners as well as people with side hustles.
Under this plan, the contributions you make are tax deductible and the limit is high. This plan currently allows its holder to put in amounts up to $18,500 each year, plus additional money of up to 25% of your income. Total annual contributions cannot exceed $55,000. However, you can put more in if age 50 or older. Even though setting up an individual 410k is easy, it still entails lot more paper work when compared to a traditional or Roth IRA.
3. Roth IRA: if you are unable to take advantage of 401k to save for your retirement, then you can go for a Roth IRA. As of now, you can contribute $5,500 per annum to your Roth IRA—or $6,500 if you’re 50 or above that age. There are tons of mutual funds that you can choose from to diversify your investment evenly between the four categories: growth, growth and income, aggressive growth and international.
A highlight of this is that since you pay taxes on the money when you initially contribute, you will be able to draw your savings in retirement tax-free. What this means is that if you should contribute the maximum amount each year, you would have saved up a whopping $1.5 million after 30 years. And what’s more, you will not have to pay income taxes to use it for retirement.
In order to be eligible to fully contribute to a Roth IRA, you must:
- Have an earned income
- Have a modified adjusted gross income—total adjusted gross income (which is the total gross income minus deductions) plus any tax-exempt interest income—that’s less than $189,000 for married couples filing jointly or $120,000 for single people.
Spouses can have two Roth IRAs even if one spouse does not work. You can contribute the maximum to both accounts, a total of $11,000 a year. For a vast majority of people, fully funding two Roth IRAs will be enough to reach the goal of investing 15% of their income for retirement.
4. IRA: if your income is on the high side, you can go for a traditional IRA. Just like a Roth IRA, you can contribute up to $5,500 annually, $6,500 annually if you’re 50 or older, and you and your spouse can both have an account.
However, that is where the similarities end. Unlike a Roth IRA, you don’t have to make less than a certain amount to be eligible to contribute to a traditional IRA because they don’t have any annual income limits. But not only are you required to begin withdrawing after you turn 70 and half, you also can’t contribute any more money. Even though contributions to a traditional IRA are tax deductible, you’ll have to pay taxes on the money you withdraw from it in retirement.
5. 403b: if you work in a non-profit organization or other such organization that are exempt from paying taxes, then a 403(b) plan is another great pretax investment option that works a lot like a 401(k). Using this plan, you can invest in mutual funds. However, it is advisable to steer away from annuities that are also usually offered in 403(b) plans.
6. Make Direct Deposits: you can make an arrangement with your employer to send some of your salary to into your IRA or another investment account. If this will not be possible, you can set-up an auto-deduction from your checking account so the contribution lands directly to your retirement fund on payday.
7. Open a taxable brokerage account: when you have exhausted the annual maximum contribution for your IRA, you can put your money in a regular investment account where you will accumulate stocks, mutual funds, bonds, et al. Even though these types of account are not tax exempt, they proffer a solution to minimize these taxes.
8. Thrift saving plans (TSP): Federal employees can save for retirement through the TSP. With a TSP you can make a matching contribution and it also allows you to make after-tax contributions with the added plus of tax-free withdrawals when you retire. You can also choose how to split your TSP contribution between several unique options.
9. Brokerage Accounts: 401(k) and IRAs are quite popular for the main benefits they come with namely, the ability to defer tax and investment options. Even though a brokerage account does not come with the advantage of tax deferral, it still offers the savers the opportunity to invest.
Brokerage accounts offer a wide range of investment selections, including individual stocks and bonds, mutual funds, exchange-traded funds (ETFs), real estate investment trusts (REITs), certificates of deposit (CDs) and money market funds.
More aggressive investment options, such as stocks, mutual funds and ETFs, have the potential to earn more than a traditional savings or checking account. Bonds, CDs and money market funds are more conservative, but they provide stability to a portfolio that is beneficial in the long run. Brokerage accounts are available through online platforms, at some banks and credit unions, or through a financial adviser or a licensed broker.
10. Tax-Deferred Annuities: annuities are yet another avenue by which someone can save for retirement due to the tax deferral and varied investment opportunities it provides. Annuities are offered to individuals or couples through insurance companies. They are made available with a fixed interest rate, an indexed interest rate (based on the performance of a specific index) or a variable rate (tied to market performance).
The funds that have been deposited into the annuity can then grow tax-deferred, however, they still remain taxable once funds are distributed during retirement years. In addition to tax deferral, annuities can provide a guaranteed income stream to the account holder for a certain number of years or for a lifetime.
In truth, annuities may not be suitable for all investors, and in addition, annuities are only backed by the claims-paying ability of the issuing insurance company. Investment performance within this type of vehicle is not guaranteed.
If you are considering going for this type of investment vehicle, then you should be cautious and carry out your research properly. Annuities are basically contracts with life insurance companies, and it is quite common for some manipulative insurance agents to sell annuities for the large commissions they earn, rather than for the benefit of the investor. These commission-based annuities are typically more expensive than other collective equity securities such as mutual funds and ETFs.
11. Real Estate Investment: yet another option that is quite a popular choice for people who are saving for their retirement is to invest in real estate. Most investors who save in a 401(k) or IRA have access to the real estate sector through holdings in a mutual fund or an ETF.
You can invest into funds that in themselves invest in real estate investment trusts (REITs) around the world. REITs are extremely cost effective, transparent and liquid. Gaining access to REITs through a mutual fund allows investors to gain global diversification in real estate in a cost-effective way.
It is also very possible to purchase real estate out rightly with the intention of yielding a steady stream of cash after retirement. For example, a couple can decide to purchase multi-family home, where they can live in one section of the house and rent out the other so that they can, effectively reducing their total living expenses month to month while expediting paying down on the mortgage balance.
When this is properly tended, the investor can have additional funds which can be set aside for retirement goals in addition to an appreciating asset that can be sold for a lump sum or rented out during retirement. However, real estate transactions and upkeep are expensive, and there is risk involved in finding and keeping quality tenants over a long period of time.
12. Micro-investment apps: you can take advantage of the advances in technology to save for your retirement with micro-investment apps. Using Micro-investment apps you can round up the amount of your purchases to the nearest dollar and tuck what would otherwise be spare change into an investment account.
You can often start investing with as little as $5, and you don’t have to go through an investment broker or financial advisor, because it’s all managed right from your smartphone.
Micro-investment apps generally offer exchange-traded funds, which are bundles of stocks, bonds or other investments, usually clustered together by risk level or similar industry. Make sure the investments offered suits your risk tolerance and overall investment strategy before signing up. Granted, you will have to supplement this option with other options in this list in order to get the type of retirement you want.
13. Earn some extra cash: if you currently in a low paying job that leaves very little to put away for your retirement, then you should consider finding something on the side that can earn you some more money. For instance, some credit cards offer cash back for a certain percentage of purchases, which can help you earn easy money as long as you’re a responsible credit card user.
You may also be able to earn money using free cash back apps at the grocery store or cash back portals for online shopping. Even if these methods will not earn you enough money to live on when your retirement comes, but they’re easy ways to earn while going about your everyday life.
If your current job gives you some extra time, then you can consider going into freelancing from the comfort of your home. If you have some easily marketable skills such as writing, editing, proofreading, data entry, transcription, web development et al, then you can head over to freelance website such as Fiver or Upwork and put up your skills up for sale.
Yet another way to make money from home is to sign up for online survey panels to get paid for voicing your opinion. If you funnel some of that money into a retirement account, it can help you jump-start your retirement savings.
14. Save in a SIMPLE IRA: another way you can save for your retirement is to put all net earnings from self-employment into a SIMPLE IRA, up to $12,500. In addition, it is possible to make a 3 percent matching contribution as an employer and an additional $3,000 catch-up contribution if you’re 50 or older.
In conclusion, if you do not already have a 401k retirement plan set, it is worth convincing your employer to set one up considering it has many advantages. It has been proven through studies that offering a 401k is a good way to reduce turnover, help recruitment and motivate employee morale. It’s also not expensive nor overly difficult to manage.
However, in the absence of a 401k plan, there are other retirement savings strategies that a person can take advantage of to ensure that they have a smooth and enjoyable retirement. When in doubt as to which one to go for, it is best to seek the services of a seasoned financial adviser to help you make the right choice.