“Alternative Retirement Plans: How to Save Without a 401(k)”

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Retirement Savings Without a 401(k): Your Options

The 401(k) is a well-known retirement fund, offering tax-deductible contributions and potential employer matches. However, not everyone has access to a 401(k). Whether your employer doesn’t offer one or you’re self-employed, there are still ways to save for retirement. Here’s how you can do it.

1. Traditional Individual Retirement Account (IRA)

A traditional IRA is a retirement account you can open and fund yourself through a bank, credit union, brokerage firm, or mutual fund provider. It mirrors a 401(k) in several ways:

• Your contributions may be tax-deductible.
• Your money will grow on a tax-deferred basis.
• You’ll be taxed on distributions you take in retirement.
• Withdrawing funds before age 59½ typically results in a 10% early withdrawal penalty.
• You must start taking required minimum distributions (RMDs) at age 73, which will increase to 75 in 2033.

Contribution Limits

In 2023, you can contribute up to $6,500 across all your IRAs. Those who are 50 and older can add an extra $1,000.

2. Roth IRA

Unlike a 401(k) or traditional IRA, a Roth IRA is funded with after-tax dollars. This allows you to withdraw your contributions at any time without penalty, provided you’ve had the account for at least five years. However, you may be taxed on Roth IRA gains if you withdraw money before age 59½. Other important details include:

• Contributions are not tax-deductible.
• RMDs are not required (unless it’s an inherited Roth IRA).
• You cannot contribute to a Roth IRA if your modified adjusted gross income exceeds $228,000 for married couples filing jointly or $153,000 for single filers.

Contribution Limits

The Roth IRA contribution limit includes money you put into other IRAs in the same year. In 2023, the cap is $6,500 ($7,500 if you’re 50 or older).

3. Solo 401(k)

Solo 401(k)s are designed for business owners without employees. They have the same requirements and rules as regular 401(k)s. As your own employee, you can make tax-deductible contributions, and as the employer, you can also contribute up to a certain percentage of your total compensation. This can significantly boost your retirement savings. Like a traditional 401(k):

• You’ll be taxed on retirement withdrawals.
• You’ll likely encounter a 10% penalty if you tap your funds before age 59½.
• RMDs begin at age 73.

Contribution Limits

As the employee, you can contribute up to $22,500 in 2023. As the employer, you can add up to 25% of your compensation. For self-employed individuals, your earned income is equal to your net earnings minus half of your self-employment tax and contributions made for yourself. Altogether, your total contributions for 2023 cannot exceed $66,000. Those who are 50 and older can contribute an extra $7,500.

4. Brokerage Account

A brokerage account is an investment account that can help you save for various financial goals. While it doesn’t offer the tax benefits of a 401(k) or IRA, it can complement those accounts. You can open one through an investment brokerage, fund it, and purchase securities such as individual stocks, ETFs, mutual funds, and more. Key points to consider:

• You’ll likely be taxed on earnings during the year they’re realized, not when the money is withdrawn.
• RMDs are not required.
• There are no early withdrawal penalties.

Contribution Limits

Brokerage accounts have no contribution limits.

5. Health Savings Account (HSA)

While not technically a retirement account, an HSA can still help you build your nest egg if you’re eligible to contribute. Available through your employer or an HSA provider, it allows you to set aside pretax dollars that you can draw on tax-free for qualified medical expenses. You may also be able to invest your balance and earn tax-free interest on your earnings. Once you turn 65, you can use the account for anything, including retirement income, though non-qualified withdrawals will be taxed. Other HSA details include:

• You must be enrolled in a high-deductible health plan (HDHP) to open an HSA. In 2023, that’s an individual health plan with a minimum annual deductible of $1,550 (or $3,000 for family coverage).
• RMDs do not apply.
• Withdrawing HSA funds for non-qualified medical expenses before age 65 will trigger an additional 20% penalty.

Contribution Limits

If you have an HDHP and self-only coverage, you can contribute up to $3,850 in 2023. The contribution limit is $7,750 for family coverage.

How to Save More for Retirement Without a 401(k)

Here are some tips to help you save more for retirement:

• Automate your contributions: Set up recurring transfers from your checking account to stay on top of your savings goals.
• Gradually increase your contributions: Aim to save 15% of your income in your 20s and 30s, and increase to 20% in your 40s and beyond.
• Avoid dipping into your retirement funds: Withdrawing funds before retirement can trigger penalties and deplete your savings.

The Bottom Line

A traditional 401(k) is a great way to save for retirement, but it’s not available to everyone. If you don’t have one through your job, you can use other types of investment accounts to build your nest egg. The key is to start saving early and consistently, even if you’re getting a late start.

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