The 401(k) is the most commonly used retirement plan in the U.S., and it’s easy to see why. Pre-tax money contributions and employee match programs are big perks. And 401(k)s are accessible – according to the Census Bureau, nearly 80% of Americans work for companies that offer a 401(k) plan.
If your company offers a 401(k) plan, it’s a no-brainer that you should participate. But what if you don’t have access to a 401(k)? There are other ways to save enough for retirement:
No 401(k)? Save with an IRA
An IRA account is a top choice for retirement savings, whether you have a 401(k) or not (you’re allowed to contribute to both.) But because there are so many to choose from, it’s important to understand the differences, benefits and restrictions that each one carries. Here’s a rundown of your main IRA options:
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Traditional IRA
A traditional IRA is a top choice if your company doesn’t offer a 401(k.) It includes a tax break on your contributions if you fit the criteria, no taxes on investment earnings if the money is in your account, and retirement withdrawals that are taxed at your bracket when you take the money out. So if you expect you’ll be at a lower tax bracket in retirement, this could be a smart way to save for retirement.
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Roth IRA
A Roth IRA does not have tax-deductible contributions, but when you do take money out during retirement, you won’t be taxed. Note that not everyone can contribute to a Roth IRA. Eligibility is contingent on your income. However, if you’re a high earner who wants to contribute to a Roth, you can do so legally through a backdoor Roth IRA.
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SEP IRA
A SEP (simplified employee pension) IRA is basically a traditional IRA that an employer offers its employees. You still have tax-free earnings, but your contribution limit is much higher. Also, employees don’t put their own money aside for this account; the employer puts 25% of your income amount away in a SEP IRA, or up to $55,000. If you are the business owner, this is usually a good option if you don’t have employees; that’s because it allows you to put more money away than other retirement options.
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Simple IRA
A Simple IRA stands for Savings Incentive Match Plan for Employees. In this plan, employees defer income to the account, and the employer is required to match a portion of that contribution (typically 2% or 3%.) It also has lower contribution limits than a 401(k) — it’s $12,500 for a Simple IRA if you’re under 50, compared to $18,500 for a 401(k). Once you’ve been contributing to a Simple IRA plan for two years, you can even do a rollover into a traditional IRA.
Solo 401(k)
Being self-employed means missing out on the traditional employer-sponsored 401(k.) But that’s what a Solo 401(k) is for. The Solo 401(k) is just that: a 401(k) for the self-employed.
This plan only works if you don’t have any employees, though your spouse can be covered as well.
You have two tax benefit options with a Solo 401(k,) and you get to choose which suits you best. You can go for the traditional 401(k) with pre-tax contributions and distributions taxed as income, or the Roth 401(k,) and its after-tax contributions and tax-free distributions.
Those are your typical choices to save for retirement if you don’t have a 401(k.) I also covered my picks for self-employed retirement plans, and an overview of 457 retirement plans.
Health Savings Account (HSA)
An HSA is another savings vehicle that helps you prepare for retirement. You might use one to save for current medical expenses, but if you haven’t thought about setting one up for retirement, you should. This is especially key if you don’t have a 401(k). That’s because medical costs usually make up a significant portion of your retirement costs.
Why an HSA instead of other savings? HSA’s come with a triple tax benefit, meaning you get:
- A tax deduction for money you put into the account
- Tax-deferred growth, so the dividends and interest from the HSA are not taxable
- No taxes when you pull money out of the account for applicable expenses
HSA’s move with you, so you can carry yours over to retirement. A family with a qualifying medical plan can save up to $6,900 for 2018. Start contributing now and you’ll have a nice fund set aside for your retirement years.
About Michael
Do you need help preparing for retirement? Contact me today to set up a meeting to talk about your goals. You can also download my free ebook for physicians for tips and information about getting your finances on track.