Money Advice

What to do if you don’t have a 401(k)

Posted by The Simply Money Advisors Team on Feb 6, 2019 9:41:26 AM

Perhaps surprisingly, there are many other workers in the same boat with you. According to data from The Pew Charitable Trusts, about 35% of private sector workers older than 22 don’t have access to this kind of retirement plan.

Not great news. But also, not the end of the world.

While you’ve got a much more difficult road to hoe than those people who have access to a 401(k), you’ll simply have to be that much more proactive.

Depending on your situation, here are 3 options to help you prepare.

You’re employed, but don’t have access to a 401(k).

Aside from the important decisions to consistently save and invest, to own your own home, and to work with a fiduciary advisor, you should probably be funding either a Traditional or a Roth IRA.

Traditional IRA:

  • $6,000 yearly contribution limits ($7,000 if age 50 or older)
  • No income limits
  • Funded with “pre-tax” money
  • Taxes applied to distributions
  • No contributions after age 70½
  • Penalties if money is withdrawn before age 59½

Roth IRA:

  • $6,000 yearly limit ($7,000 limit if age 50 or older)
  • Contribution limits kick-in when income exceeds $122,000 (for single tax filers), or $193,000 (married filing jointly)
  • Funded with “after-tax” money
  • You pay no taxes on earnings distributions once you reach age 59 ½ and have held the account for at least 5 years
  • No contribution age limits
  • Contributions can be withdrawn at any time without penalty

Traditional or Roth: which should you choose?

First, with their extremely low contribution limits (by comparison, 401(k) plan participants can contribute 3X as much), IRAs should be seen as just a single part of your overall approach to saving for retirement.

Generally, if you’re going to be in a lower income bracket once you retire (which is, obviously, difficult to predict), you’re better off with a Traditional IRA.

But we also like the idea of diversifying your retirement money into accounts with different tax structures because it gives your money more flexibility. This is where a Roth IRA (and its tax-free distributions) can come in handy.

You’re self-employed, but don’t have full-time employees.

Some sole proprietors, consultants, freelancers, independent contractors, and people who own their own businesses/companies (but don’t have full-time employees), have a terrific option when it comes to saving for retirement: fund a Solo 401(k). This is also known as an “Individual K,” or an “Owner-Only 401(k).”

Solo 401(k)s are a great tool for eligible savers given their flexibility and extremely high contribution limits (especially when compared to an IRA’s inexplicably low limits).

Basic facts about Solo 401(k)s:

  • There are no age or income restrictions
  • Contributions must come from self-employment income
  • You can still earn income from a regular job
  • You can even still have a 401(k) from an employer
  • You can’t have any full-time employees
  • The maximum contribution amount is $56,000
  • Contributions can be either pre-or-post tax

However, when it comes to your investment options, there’s almost too much flexibility for the average person. In fact, the IRS doesn’t stipulate what a Solo 401(k) plan participant can invest in, only what he or she can’t.

If you’re thinking of opening a Solo 401(k), we highly recommend meeting with a fiduciary financial advisor first.

You’re a business owner with employees.

Somewhat like employees of companies that do not offer a 401(k) (or pension), saving for retirement when you’re a business owner (with employees) surely means meeting that challenge by using a variety of approaches and vehicles.

One good way to begin is to open a SIMPLE IRA.

While you can open one for your employees, for our purposes, let’s briefly focus on how a SIMPLE IRA helps you save for retirement.

SIMPLE IRAs offer you:

  • Tax-deferred contributions
  • Distributions taxed as ordinary income
  • Significantly higher contribution limits ($13,000/$16,000 if age 50 or older) than IRAs

While a SIMPLE IRA is a good option for business owners with employees, remember, all investments carry some risk. If you aren’t absolutely certain about your risk tolerance, and you have limited experience when it comes to selecting investments, you should speak with a fiduciary advisor rather than risk your hard earned savings on anything you don’t clearly understand.

The Simply Money Point

One final note about IRAs: we’ve long believed it patently unfair that those people who are fortunate enough to have access to a 401(k) (and its cousins, the 403(b) and 457) get to sock away substantially more tax-deferred money than those who don’t (as of 2019, $19,000 to $25,000 [if you’re 50 or older]).

But the government seems unwilling to up the IRA contribution limits to address this disparity.

Retirement, and the tax laws surrounding things like IRAs and Social Security, are becoming increasingly complex, and we don’t anticipate them changing for the better in the future.

Do you have questions about retirement planning or investing? Contact us today.

Topics: Retirement Planning


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