The conventional way for Americans to save for retirement is through a 401(k) offered by their employer. However, this leaves a lot of people out, such as people working jobs without retirement benefits, freelancers, and small business owners. Yet people in this situation still need to retire someday. How can you save for retirement without an employer-provided 401(k)? While IRAs are one solution, you may end up piecing together several plans to ensure you’re saving enough.
IRAs
An IRA (individual retirement account) is a retirement savings account you can open on your own. So regardless of your circumstances, you can always have one of these. Like a 401(k), you can contribute money before taxes. Or, if you get a Roth IRA, you can contribute after taxes and then withdraw the money tax-free during your retirement.
One key difference between an IRA and a 401(k) is the contribution limit. A 401(k) lets you contribute $22,500 a year, not including employer contributions. But an IRA only allows you to save $6,500. If your income is moderate to high, you can save much more than this in a year. Plus, you’ll likely need much more than that in savings when you retire.
SEP IRA
The SEP (simplified employee pension) IRA allows small business owners and freelancers to save more than they could in a normal IRA. You can contribute between 0% and 25% of your salary each year, with a maximum of $66,000 annually.
There’s just one catch: all employees must receive the same percentage. You, as the employer, are the only one who can contribute. So you can easily control your own savings amount as the business owner, but if you have employees, it may mean large contributions to their retirement accounts as well.
SEP 401(k)
Just because you don’t have an employer doesn’t mean you can’t have a 401(k). SEP 401(k)s, also known as solo 401(k)s, are an option for self employed workers or business owners with no employees. You and your spouse can both contribute.
Since you’re both the employee and the employer, you can contribute in two ways. As an employer, you can contribute up to 25% of your salary. As an employee, you can contribute the same as you would in a regular 401(k)—$22,500 in 2023.
SIMPLE IRA
This is an account for self-employed individuals or companies with under 100 employees. It works similarly to a 401(k), with both employee and employer contributions. Employees, including yourself, can contribute up to $15,500 annually. But as the employer, you must also contribute one of two ways. Either you match employees’ contributions up to 3% of their salary, or you contribute 2% of their salary directly.
Health Savings Accounts
If you have an HSA (health savings account), don’t forget to contribute to it. You can contribute up to $3,850 before taxes every year ($7,750 for families). If you use the money for health expenses, you also pay no taxes when you withdraw the money. Normally, if you use the money for something that isn’t a health expense, you’ll pay a 20% penalty as well as income tax. However, after retirement that penalty goes away, so you’ll only pay income tax, just like 401(k) withdrawals.
Still, the smartest way to use that money is on health expenses during your retirement. You are likely to have many healthcare needs then. Plus, HSA funds can be spent on long-term care if you turn out to need it.
Other Investments
Don’t forget that you don’t need a retirement account to invest for retirement. Although the tax benefits of a 401(k) or IRA are good to have, you can also invest in conventional vehicles like certificates of deposit, bonds, and mutual funds. This is a good strategy when you’ve maxed out contributions in other vehicles but still want to save more.
By saving this way, you can grow your nest egg while not having to worry about the many limitations of tax-advantaged accounts. You can contribute as much as you want, keep it in the fund as long as you want, and withdraw it whenever you want. But you should definitely have a professional advise you on minimizing your taxes when you go this route.
Talk to an Expert
If you don’t have an employer-provided 401(k), your retirement savings won’t be automatic. You have a lot of options to choose from, and there’s no one right answer about which you need. The best course is to find a professional who can advise you on how you can manage your retirement savings. To meet the right financial advisor for you, contact us today.
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