Can I Start Retirement Planning Without a 401(k)?

401(k)s are a great way to save for retirement. You don’t pay any tax on your contributions and your money grows tax free all the way to retirement. Throw in employer matching contributions and 401(k)s have become the preferred retirement savings method for many of us.

But 401(k)s must be offered by employers and not all employers offer them. If you don’t have access to one, you may be wondering, “Can I start retirement planning without a 401(k)?” The answer is yes. You have several retirement savings options outside of a 401(k) and getting started is easy.

INDIVIDUAL RETIREMENT ACCOUNTS (IRAs)

If you don’t have access to a 401(k), an IRA is a substitute with similar advantages. Just like a 401(k), you can invest money into the account on a pre-tax basis. That means that you get a tax deduction for putting up to $6,000 away every year. If you’re 50 or older, you can contribute even more — up to $7,000 annually since you can make an additional $1,000 catch up contribution. With IRAs, you pay income tax when you withdraw your money in retirement.

ROTH INDIVIDUAL RETIREMENT ACCOUNT (ROTH IRA)

Roth IRAs are the inverse of IRAs and 401(k). Rather than investing with pre-tax dollars and paying tax when you take out money, you invest after taxes are paid but you don’t have to pay tax when you withdraw money in retirement.

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Both IRAs and Roth IRAs have contribution limits, meaning the total amount you can put into an IRA annually (whether it’s Roth, traditional or a mix of both) is $6,000. Additionally, if your income is above a certain threshold, you may not be able to contribute to a Roth IRA. Here’s how the limits work:

For single filers:

• If you make more than $122,000, the amount you can contribute is reduced.
• If you make more than $137,000, you can no longer contribute.

If you’re married, filing jointly:

• If you make more than $193,000, the amount you can contribute is reduced.
• If you make more than $203,000, you can no longer contribute.

NON-QUALIFIED INVESTMENTS

These investments don’t get any special tax treatment. Because of that, there aren’t any restrictions on how much you can invest in non-qualified accounts, such as a standard brokerage account. These can include direct investments in stocks or bonds; however, most people buy mutual funds or ETFs, which invest in a basket of stocks, bonds or other investments for you.

Depending on the type of investment and how much you make with it, you may owe taxes on any dividends or earnings you get from non-qualified investments. You will also likely owe capital gains taxes if you sell them for a profit.

WHOLE LIFE INSURANCE

In addition to its death benefit, whole life insurance builds cash value that is guaranteed to grow and never decline in value. You can access the cash value throughout your life and for anything you want. In retirement, cash value can be a great way to supplement your income – particularly because it’s not affected by market downturns.

In addition, because it will pay a death benefit, oftentimes a surviving spouse can use those proceeds late in retirement. Keep in mind that utilizing cash values will reduce the death benefit.

SPECIAL OPTIONS FOR BUSINESS OWNERS

If you’re a business owner, you have some additional options that you can use to plan for retirement.

Simple IRA: A simple IRA is designed for companies with fewer than 100 employees. You and your employees can each contribute up to $13,000 per year toward retirement. Once you turn 50, you’re then eligible to contribute an extra $3,000 annually. As an employer, you can match those contributions up to 3 percent of your salary or you can make a non-elective 2 percent contribution for every eligible employee, whether or not they have contributed to their SIMPLE IRA.

SEP IRA: SEP IRAs are perfect for entrepreneurs. You can either contribute up to 25 percent of your pay or $56,000 (whichever is less). If you’re over 50, you can contribute an extra $3,000. Your contributions are tax deferred, which means you get an income tax credit for your contributions. 

Solo 401(k): This is a 401(k) plan for entrepreneurs. You can contribute in two different ways: elective deferral and profit sharing. If you opt for an elective deferral, you can contribute up to $19,000 in pre-tax income toward your 401(k). After age 50, you can contribute up to $6,000 extra. If you opt for profit sharing with your Solo 401(k), you can share up to 25 percent of your pay with your account so long as the amount doesn’t exceed $56,000.

PLANNING FOR RETIREMENT WITHOUT A 401(k) IS EASY

You’ve already taken the first step to learn more about your options to save for retirement without a 401(k). If have additional questions or would like to get started with any of these options, a financial advisor can help you put together a plan to reach your financial goals.