Many employers don't provide a 401(k) as a retirement savings option. However, even without one, you can still stay on track for a timely retirement.
If you work for a company that has a 401(k), it's straightforward to accumulate your retirement savings. Contributions are automatically deducted from your paycheck before taxes, allowing you to set aside money without a second thought. This not only saves you tax money but also minimizes the temptation to spend. It's an excellent way to prioritize your financial health, a key principle of wealth building. Plus, if your employer matches your contributions, that's essentially free money boosting your investment growth.
But if you lack a 401(k), don't be discouraged. There are numerous alternatives for saving for your future. Whether you're self-employed, freelancing, or currently not employed, there are effective strategies to kickstart your retirement planning while enjoying potential tax benefits. Here's a breakdown of options suitable for everyone.
Consider a SEP or Solo 401(k)
If you earn income through freelance or self-employment, even occasional gig work qualifies you for a simplified employee pension (SEP) or solo 401(k). Contributions can lower your taxable income and grow tax-deferred. With a solo 401(k), you may also opt for Roth contributions, which don't provide immediate tax relief but allow tax-free withdrawals in retirement. SEPs are easy to set up through many brokerage firms, banks, and mutual fund companies. You can contribute around 20% of your self-employment income, capped at $58,000 for 2021. Alternatively, a solo 401(k) allows contributions of up to $19,500 (or $26,000 if you're over 50), plus about 20% of self-employment income, totaling up to $58,000 in 2021.
Automate Your IRA Contributions
Anyone earning income can contribute to an IRA, regardless of whether they also have a 401(k). You can deposit up to $6,000 in 2021 (or $7,000 if you're 50 or older). If your income is below $125,000 in 2021 (or $198,000 for married couples filing jointly), those contributions can go into a Roth IRA. A Roth doesn't offer immediate tax benefits, but allows tax- and penalty-free withdrawals of contributions anytime, with tax-free earnings after age 59 ½. You can open an IRA through a brokerage, bank, or mutual fund company. Contributions can be made anytime during the year (even up to April 15, 2022), or you can set up automatic monthly transfers from your bank account to simulate the ease of a 401(k).
Utilize a Spousal IRA
If you or your spouse aren't earning income — whether due to caregiving, being laid off, or retirement — your working spouse can fund a spousal IRA for you. The funds remain in your IRA, which can be a traditional or Roth IRA based on your combined income, offering the same investment options. You can contribute up to $6,000 in 2021, or $7,000 if you're 50 or older.
Explore a Triple Tax-Free HSA
You may qualify for a triple tax-free health savings account (HSA). While often seen as a way to save for healthcare expenses, HSAs have additional benefits. Contributions are tax-deductible (or pre-tax if through your employer), funds grow tax-deferred, and withdrawals for qualified expenses are tax-free. You can use HSA funds for health insurance deductibles, co-pays, prescription medications, and many over-the-counter items, including menstrual products. After age 65, you can use the account tax-free for Medicare premiums. There are no expiration rules — you can let the funds grow over time. If withdrawals are made for non-qualifying expenses before age 65, you'll incur taxes and a 20% penalty; however, the penalty disappears post-65, and only taxes apply for non-eligible withdrawals. To qualify for HSA contributions in 2021, you must have a qualifying health insurance policy with a deductible of at least $1,400 for individual coverage or $2,800 for family coverage, whether obtained through employment or individually.
Match Time and Risk with Strategy
Regardless of how you choose to save for retirement, aligning your investments with your timeline and risk appetite is crucial. Each of these accounts allows investment in mutual funds and stocks, alongside money market or savings accounts. As you strategize your retirement savings, consulting a financial advisor can enhance your use of these tax-advantaged accounts for your financial well-being.
