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No 401(k)? How to save for retirement

Don't worry—there are tax-advantaged options for people without a 401(k).

Fidelity Viewpoints
– 04/29/2019
1976

Key takeaway

Freelancers and independent contractors have some of the same retirement plan options as small-business owners including the IRA, SEP IRA, SIMPLE IRA, and self-employed 401(k).

When it comes to saving for retirement, the advice is usually, "Save in your 401(k)." But lots of people don't have a 401(k), 403(b), or other workplace retirement savings account. About 30% of working households don't have access to workplace retirement plans, according to data from the Department of Labor.¹

If you are one of the millions of freelancers, entrepreneurs, workers with a side gig—or an employee with no workplace retirement plan—you can still save for retirement. As long as you have some earnings, you have some tax-advantaged saving options.

IRA

You've probably heard of IRAs, short for individual retirement accounts. If not, or you're not sure how they work, here are the basics. An IRA is a type of retirement savings account that comes with some nice tax benefits, including tax-free or tax-deferred compounding. Other tax breaks depend on the type of IRA you choose—the basic types are a traditional IRA and a Roth IRA.

Who can open one?
Anyone with earned income (including those who do not work themselves but have a working spouse) can open an IRA. You can contribute up to $6,000 in 2019 ($7,000 if you’re age 50 or older). The Internal Revenue Service (IRS) periodically adjusts the contribution limit for inflation.

There are some income limitations on both traditional and Roth IRA contributions.^2,3

How it works
Contributions to a traditional IRA might be fully deductible, partially deductible, or entirely nondeductible depending on whether you and/or your spouse are covered by a retirement plan through your employer. If a taxpayer is covered by a retirement plan at work, their income determines whether their IRA deduction will be limited. Retirement plans at work include 401(k) plans, 403(b) plans, and pensions.

Deductibility of traditional IRA contributions depends on your modified adjusted gross income (MAGI). Deductibility is phased out at applicable MAGI levels.

After age 59½, you can withdraw contributions and earnings without penalty—but your withdrawals will be taxed as ordinary income. An exception to this occurs if your contributions were not deducted from your taxable income when you made them. In that case, the portion of your withdrawals that corresponds to the nondeductible contributions will be tax-free. After age 70½ you can no longer contribute to the traditional IRA and must begin taking required minimum distributions (RMDs).

A Roth IRA contribution does not give you a current tax deduction—contributions are made with after-tax money. But when you withdraw money after age 59½ (provided that the 5-year aging requirement has been satisfied), no taxes are due on earnings or contributions as long as you have met the 5-year holding requirements for the account. The Roth IRA does allow you to withdraw up to the total amount of your contributions from the account at any time tax-free and penalty-free—but not the earnings on these contributions. If you have earned income, you can contribute up to that amount past age 70½—with no required minimum distributions at any time during the lifetime of the original owner.

This hypothetical example assumes the following: (1) annual IRA contributions on January 1 of each year for the age ranges shown, (2) annual $6,000 contribution for first year and thereafter, (3) an annual rate of return of 7% and (4) no taxes on any earnings within the IRA. The ending values do not reflect taxes, fees, or inflation. If they did, amounts would be lower. Earnings and pre-tax (deductible) contributions from traditional IRAs are subject to taxes when withdrawn. Earnings distributed from Roth IRAs are income tax-free provided certain requirements are met. IRA distributions before age 59½ may also be subject to a 10% penalty. Systematic investing does not ensure a profit and does not protect against loss in a declining market. This example is for illustrative purposes only and does not represent the performance of any security. Consider your current and anticipated investment horizon when making an investment decision, as the illustration may not reflect this. The assumed rate of return used in this example is not guaranteed. Investments that have potential for a 7% annual rate of return also come with risk of loss.

Who it may help
The IRA—either a traditional or Roth IRA—is good for nearly everyone with an earned income, or a nonworking spouse. High earners who have, or whose spouses have, workplace plans may not be able to get a deduction for a traditional IRA contribution, and those who have high incomes may not qualify for a Roth contribution, either—but they may be able to convert a traditional IRA into a Roth IRA.^2,3 Other than that, the only drawback is, that compared with other retirement accounts, the IRA has a relatively low contribution limit.

Things to keep in mind
The deadline for contributing for 2019 is the tax deadline next year—April 15, 2020. Every tax year, you get about 15½ months to get your contribution into the account. The deadline is generally set in stone—getting an extension on your taxes won't give you any extra time to contribute to a traditional or Roth IRA.

Though there is typically a 10% penalty imposed on early withdrawals, some situations like disability and first-time home purchases qualify for a waiver of the early withdrawal penalty. Visit IRS.gov for more information about qualified early distributions.

Read Viewpoints on Fidelity.com: Traditional or Roth account —2 tips to choose

SEP IRA

If you are self-employed or have income from freelancing, you can open a Simplified Employee Pension plan—more commonly known as a SEP IRA. Even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA.

Who can open one?
The SEP IRA is available to sole proprietors, partnerships, C-corporations, and S-corporations.

How it works
The SEP IRA, like a traditional IRA, allows contributions to potentially be tax-deductible—but the SEP IRA has a much higher contribution limit. The amount you can put in varies based on your income. In 2019, the most an employer can contribute to an employee's SEP IRA is either 25% of eligible compensation or $56,000, whichever is lower. (Note that the rules on determining eligible compensation, which are different for self-employed and employee SEP participants, can be complex. Consult a tax expert or the IRS website for details.)

If you have employees, you have to set up accounts for those who are eligible, and you have to contribute the same percentage to their accounts that you contribute for yourself. Employees cannot contribute to the account; the employer makes all the contributions.

The employer contributions to a SEP IRA won't affect your ability to contribute to an IRA as an individual. So, depending on your eligibility, you could still contribute to a traditional or Roth IRA.

Who it may help
This account works well for freelancers and sole entrepreneurs, and for businesses with employees (as long as the owners don't mind making the same percentage contribution for the employees that they make for themselves). The SEP IRA is generally easy and inexpensive to set up and maintain. Plus, there are generally no tax forms to file.

Things to keep in mind
Catch-up contributions aren't allowed with the SEP IRA, nor are employee deferrals. As the employer, you can contribute up to 25% of each employee's eligible compensation, up to $56,000 per employee—as long as the same percentage is contributed for all employees.

The deadline to set up the account is the tax deadline—so for 2019 it will be April 15, 2020. But, if an extension is granted for filing the employer's tax return, the employer has until the end of the extension period to set up the account or deposit contributions.

Read Understanding the SEP IRA for more information.

Self-employed 401(k)

A self-employed 401(k), also known as a solo 401(k), can be an option for maximizing retirement savings even if you're not making a ton of money. Before-tax and after-tax employee contributions are technically allowed in a self-employed 401(k) but not all financial institutions offer the option.

Who can open one?
If you are self-employed or own a business or partnership with no employees you can open a self-employed 401(k). A spouse who works in the business can participate as well.

How it works
You get 2 opportunities for contributing to a self-employed 401(k)—first as the employee, and again as the employer.

As the employee, you can choose to make a tax-deductible or Roth contribution of up to 100% of your compensation, with a maximum of $19,000 in 2019. Once you're over age 50, you can also make catch-up contributions—for 2019 you can save an extra $6,000, for a total of $25,000.

As the employer, you can contribute up to 25% of your eligible earnings The employer contribution is always made before tax. (Again, consult a tax expert or the IRS website for details on computing eligible earnings.)

Who it may help
The self-employed 401(k) is another account that offers a high potential contribution limit for self-employed people. The total that can be contributed for employee and employer is $56,000, plus an additional $6,000 for people age 50 and over.

Things to keep in mind
The self-employed 401(k) can be a little complicated to run. After the plan assets hit $250,000, you have to file Form 5500 with the IRS.

The deadline for setting up the plan is the end of the fiscal year, generally the last business day of the year, which in 2019 is Tuesday, December 31. You can make employer contributions to the account until your tax-filing deadline for the year, including extensions.

Read Understanding the Self-Employed 401(k) for more information.

SIMPLE IRA

A SIMPLE (Savings Incentive Match Plan for Employees) IRA is another option for people who are self-employed. Like a 401(k), this account offers tax-deferral and pretax contributions, plus an employee contribution and an employer match.

Who can open one?
Anyone who is self-employed or a small-business owner can open a SIMPLE IRA. Small businesses with 100 employees or fewer can also open a SIMPLE IRA plan.

How it works
Like the self-employed 401(k), you get 2 chances to contribute.

As the employee, you can contribute up to 100% of your compensation, up to $13,000 in 2019.
As the employer, you must either put in a 3% matching contribution or a 2% non-elective contribution. The latter is not contingent on the employee contribution, the way a matching contribution to a 401(k) typically is.

But be aware that a SIMPLE IRA can require the employer to make contributions to the plan even if the business has no profits.

Who it may help
The SIMPLE IRA is an inexpensive plan for businesses with fewer than 100 employees. It also allows for salary deferrals by employees and there are no tax forms to file.

The SIMPLE IRA also allows those age 50 and over to save an additional $3,000 a year.

Things to keep in mind
The deadline to set up the plan is October 1. You can make matching and nonelective contributions until the company's tax filing deadline—including extensions.

Read Understanding the SIMPLE IRA for more information.

Pick a plan and start saving

There's a wide variety of retirement saving options. After evaluating your choices, get started saving. Time is one of the most important factors when it comes to building up your retirement fund. While you're young, time is on your side. Don't let the absence of a workplace retirement plan like a 401(k) stand in your way. There are plenty of other retirement savings options—pick a plan and start saving and investing.