Center for a Secure Retirement
Options for Building Your Retirement Savings Without a 401(k)

Options for Building Your Retirement Savings Without a 401(k)

A 401(k) is one of the best-known and most common tools for saving for retirement, but not everyone has access to one. Having a 401(k) or not is often generational — younger generations typically self-fund their retirement through 401(k)s and other products, while baby boomers often have a pension plan provided by their employer.

Maybe your employer doesn't offer a 401(k), or maybe you don't meet the eligibility requirements. Or, you might just want to contribute more to your retirement savings than your current accounts allow. Luckily, there are several ways to build your retirement savings without a 401(k). Here's what you need to know about your options so you can decide what's best for you.

Traditional and Roth IRAs

If you can't invest in a 401(k), an individual retirement account (IRA) is a good alternative. Like 401(k)s, IRAs are common, but they don't require employer sponsorship. The two main options are traditional and Roth IRAs.

Traditional IRAs are tax-deductible. That means you could take a deduction on your taxes up to the contribution limit — $6,000 in 2020 and 2021, or $7,000 if you're age 50 or older, per the IRS — depending on your modified adjusted gross income (MAGI) and whether you're covered by your employer's retirement plan. The IRS lays out the cases in which this deduction could be limited. For instance, if you're covered by a retirement plan at work and file as an individual, you'd have to earn $65,000 or less to get the full deduction. If you're a married couple filing jointly, you'd have to earn $104,000 or less to take the full deduction. However, if you're not covered by a retirement plan at work, there's no limit on your MAGI as an individual, and married couples earning $196,000 or less get the full deduction.

Roth IRAs don't get a tax deduction, but the trade-off is that the money that grows in the account usually isn't subject to income tax in the future. A Roth IRA, like a traditional IRA, comes with income limits from the IRS: If you file as an individual, you'd have to earn $124,000 or less to contribute the full amount of $6,000 (or $7,000 if you're age 50 or older). If you're married and filing jointly, you'd have to earn $196,000 or less to contribute the full amount.

IRAs come with other perks, such as asset protection from creditors, but their contribution limits make it difficult to reach your retirement goals if you're not contributing the maximum.

SEP and SIMPLE IRAs

If you're looking to build your retirement savings without a 401(k) because you're self-employed or own a business, a simplified employee pension (SEP) or a savings incentive match plan for employees (SIMPLE) IRA might be another good choice. Each is designed for small businesses and people who are self-employed, and each has constraints set by the IRS, just like traditional and Roth IRAs. Contributions to a SEP IRA can't exceed 25% of your business income, and the contribution limit is $57,000. Employee SIMPLE IRA contributions can't exceed $13,500, or $16,500 if you're age 50 or older, and the maximum employer contribution is 3%.

SEP and SIMPLE IRAs have lower limits than 401(k)s, but they might be more cost-effective to implement, depending on your business.

Non-Qualified Accounts

Non-qualified accounts are another way to save if retirement plans don't offer enough to meet your goals. There are no income or contribution limits on non-qualified accounts, but they're not tax-deductible. Depending on the investments, they're taxed at either ordinary or capital gains rates.

Your investment choices aren't restricted here; you could explore investing in stocks, bonds, mutual funds, annuities, real estate and more depending on your risk tolerance and financial plans. Consult with a financial advisor to understand which investments would make the most sense for you. Note that, unlike IRAs and 401(k)s, non-qualified accounts don't offer any sort of asset protection since they aren't classified as retirement plans.

Create a Budget That Works for Your Savings Goals

With any retirement investments or savings options, it's important to first create a budget that will allow you to save what you need. A general rule of thumb is to save at least 20% of your employment income. Based on how much retirement income you'll need, a budget will show you which areas of your finances might need improvement to allow you to grow your savings. If you're not sure about a financial decision, speaking with a professional can help give you confidence that you're making a well-thought-out choice that's right for you.

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