So you’re all set to begin saving your literal behind off – you’re on fire about FI/RE, or you’ve just gotten to the point where you know you need to start saving if you’re ever going to get ahead. Problem is, you have no 401k available to you through your employer. Most all advice says to max out your 401k in order to really jump-start your retirement savings, so what can you do to save if you have no 401k? For the purpose of this article, we’re referring to 401k plans in general. If your employer offers a 403b plan instead of a 401k, of course that’s the best replacement. The same is true for 457 or Thrift Savings Plans (governmental), or SEP-IRAs or SIMPLE IRAs where offered. Turns out there are several things you can do to save with no 401k. The 401k has only been around for 40 years (Actually 40 years this year: Happy Birthday, 401k!), and people have been saving for centuries without 401k plans. Plus, the good news is that even if you have a 401k available to you, many of the options listed below are also available to you, some more limited than others due to your participation in a 401k. But feel free to mix and match savings vehicles as allowed – the more ways to save, the better! First, let’s take a look at why the 401k is such a popular option:
There are many more benefits to the 401k, but those are the most significant ones that serve the purposes of this article. Now let’s look at some alternatives. IRAIf you have no 401k available from your employer and your spouse also does not have a 401k with an employer, you can open and fund a traditional IRA. The contribution limits are significantly less than the 401k limits listed above. Let’s run through the five benefits of 401k’s and compare them to an IRA:
Now, if your spouse is participating in a 401k or other retirement plan from his or her work, there can be limits on the deductibility of your IRA contributions. If your spouse participates in a 401k plan, you can fully deduct IRA contributions if your household income is below $189,000, and limited deduction is available up to $199,000 (2018 figures). These figures have increased to $193,000 and $203,000 respectively in 2019. Above those limits, the tax-deductibility benefit (#3) of contributions is lost. At this stage you would make the decision of whether it makes sense to still make non-deductible contributions to your IRA, or choose another option from the choices below for your saving activities. A point in favor of an IRA (versus a 401k) is that you are not limited to an arbitrary list of possible investments like most 401k plans are. So you are free to make wise decisions about your investments in the IRA account, keeping the internal costs low in order to keep more of your money working for you. Another item that makes the IRA a bit more favorable is that you can access the money much more easily than when it’s in a 401k (especially if you’re still employed by that employer). The downside is that with this flexibility comes the responsibility to maintain discipline and not raid your long-term retirement savings until you’re actually in retirement. There are penalties for early distribution from an IRA to help with maintaining this discipline, but you’re still in charge. Don’t blow it! So the IRA, although limited in the amounts that can be deferred, and with the income limitations in some cases, matches up pretty well with the 401k for benefits, with the virtually unlimited investment flexibility as a positive point for the IRA. As mentioned, a Roth IRA could be another alternative if the tax-deduction feature is not as important to you. This is a good place to start. Let’s see what other options are available to save. Health Savings AccountIf you have this option available to you, a Health Savings Account (HSA) can be another avenue for longer-term savings. If you have a High Deductible Health Plan available via your employer or you have set one up as a self-employed person, the Health Savings Account can provide a good place for savings. Looking at the list of 401k benefits versus an HSA:
If you don’t need to raid the HSA during your pre-retirement years to pay for medical expenses, a HSA can provide a significant resource for paying medical expenses later in life. As you can see, the HSA is yet another alternative that can work in a positive way toward your savings goals when you have no 401k. They’re much more limited in the amounts you can contribute, but otherwise have most of the same features available as a 401k. Taxable investment accountDon’t let the inclusion of “taxable” in the name of this savings vehicle put you off. It’s really not as bad as all that – this name is used to make it clear that this account is not allowed to defer income tax in the manner that a 401k or IRA can. With a taxable investment account, any time there is an income event, you will be responsible for including that income on your tax return and paying tax as applicable. This type of account can be easily set up at a multitude of brokerages, mutual fund companies, and the like. Let’s do the comparison to a 401k:
We give up points #1 and #3 to the 401k in this comparison, but you have no limits (#2), you can set up the automatic contributions (#4), and depending on your investment choices, the taxation or tax deferral may be even more favorable in a taxable investment account. Even more than with the IRA, you have pretty much unfettered access to your taxable investment account for withdrawal at any time, regardless of your age. This can be a positive or a negative, depending on the circumstances. If you have a short-term need for some money that can’t be found elsewhere, this account can be just the ticket to allow you to not go into debt. But you need to be cautious, especially if your taxable investment account represents a significant portion of your retirement savings. You don’t want to derail the hard work you put into saving that money by withdrawing before its intended use in retirement. Self-employed optionsIf you happen to be self-employed (even with a small side hustle), you have several alternatives available to you. One of the obvious options is a one-person 401k plan, or solo-401k. Although there can be some paperwork headaches involved, this option gives you the same flexibility as an employer-sponsored 401k, except that you’re in charge. Your contributions are limited to the same limits as a 401k from your earnings, but you can also make contributions as the employER in the arrangement as well. You can contribute up to 25% of compensation as the employer, up to a total of $55,000 in 2018, or $56,000 in 2019. This amount is reduced by the compensation deferral amount, not including your catch-up contributions. Another alternative for a self-employed individual or small business is the SIMPLE IRA. This option is a bit less onerous than the solo 401k, with lower contribution limits. As the employee, you can defer up to $12,500 of your compensation with a $3,000 catch-up contribution if over age 50 (2018 figures – for 2019 the contribution limit is increased to $13,000, with the catch-up still at $3,000). As the employer you are required to make either a matching 3% contribution or a non-elective 2% contribution to all plan participants. If you’re a one-person shop, this can be a good alternative, offering matching benefits to a 401k plan, except for the contribution limits. Still another option for the self-employed is the SEP-IRA. Again, with limited paperwork versus the 401k plan, the SEP-IRA gives a self-employed individual the ability to defer up to 25% of your compensation, with the limits of $55,000 for 2018 or $56,000 in 2019, plus the over-50 catch up amount of $6,000. Other alternativesIn several states, there may be an option available soon: Oregon is the first, and California is starting in 2019, to offer state-based retirement plans for small employers. If you’re in one of the states that are planning these accounts (Oregon, California, Illinois, Maryland, Connecticut, New Jersey, New York, Washington state, Vermont and Massachusetts), keep your eye out for more information. This can be a good option if you have no other means to start saving. Some folks would also recommend looking at an annuity as an alternative when you have no 401k available. Annuities can have many of the features of a 401k plan except for tax-deductibility, with the additional benefit of flexible contributions with no annual limits. A downside to annuities can be the internal costs – because you are paying for insurance against your longevity, these internal costs can be a significant drag on your returns in an annuity. A plus for annuities is that they can provide guaranteed lifetime income to you upon retirement, where most other plans have no such capacity for guarantee. As a last point, keep in mind that you can use many types of investment for your retirement savings – including all of the above in varying amounts, plus other types of investments like real estate. The best sort of retirement savings plan includes portions of many types of investing and saving activities, providing a varied type of income from many sources through your future retirement. Use as many of the above types of investment as you can! Do you have other alternatives to offer that I’ve overlooked? The post What can you do to save if you have no 401k? appeared first on Getting Your Financial Ducks In A Row. Via https://financialducksinarow.com/12801/save-no-401k/
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AuthorHi I am Evelina Bryant , I am 32 years old from Big Bear Lake, CA. I am woring as a financial analyst with local financial services company. ArchivesNo Archives Categories |