No 401(k)? How to save for retirement

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 31% 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-advantaged compounding. Other tax breaks depend on the type of IRA you choose—there are two basic types: 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. Alimony is also considered income for IRA contribution purposes. You can contribute up to $5,500 in 2016 ($6,500 if you’re age 50 or older). The IRS adjusts the contribution limit for inflation annually.

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

How it works
A traditional IRA may give you a tax deduction in the year the contribution is made, meaning you deduct the contribution amount from your total income as long as it’s within the limits. After age 59½, you can withdraw contributions and earnings without penalty—but your withdrawals (except for any contributions that didn’t qualify for a deduction) will be taxed as income. After age 70½ you can no longer contribute to the traditional IRA and must begin taking minimum required distributions.

A Roth IRA does not give you a tax deduction—contributions are made with after-tax money. But when you withdraw money after age 59½, no taxes are due on earnings or contributions. The Roth IRA does allow you to withdraw contributions from the account at any time. And you can continue to contribute to the account as long as you have earned income—with no distributions required.

Consistently saving in an IRA over the course of your career could really pay off. If a hypothetical investor began contributing and investing $5,500 to an IRA at age 25 and keep making the same annual contribution until age 65, you could potentially accumulate $703,119—assuming a 5% rate of return.

Who it may make sense for
The IRA is good for nearly everyone with an earned income, or a nonworking spouse. But high earners who have, or whose spouses have, workplace plans may not be able to get a deduction for a traditional IRA contribution, and they may not qualify for a Roth contribution either. Other than that, the only drawback is that compared with other retirement accounts, the IRA has a relatively low contribution limit.

Things to be aware of
The deadline for contributing for 2016 is the tax deadline next year—April 17, 2017. Every tax year, you get about 15-and-a-half 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 qualify for a waiver of the early withdrawal. Visit IRS.gov for more information about qualified early distributions.

• Read Viewpoints: "Traditional or Roth account—two tips for choosing" and "IRAs: 8 things you may not know."

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 is a traditional IRA, contributions may 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 2016, you can save 25% of pre-tax income (20% if you are self-employed) or $53,000, whichever is lower.

If you have employees, you have to set up an account 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.

Even though a SEP IRA is a traditional IRA, the employer contributions won’t impact 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 make sense for
This account works for freelancers, one-man bands, or businesses with employees. The SEP IRA is generally easy and inexpensive to set up and maintain. Plus, there are generally no tax forms to file.

Things to be aware of
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 of your employees’ compensation, up to $53,000—as long as you contribute the same percentage to all employees.

The deadline to set up the account is the tax deadline—so for 2016 it will be April 17, 2017. But, if you get an extension for filing your tax return, you have 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 allowed in a self-employed 401(k) technically 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). Spouses who work in the business can participate as well.

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

As an employee, you can choose to make a tax-deductible or Roth contribution of up to 100% of your compensation, with a maximum of $18,000 in 2016. Once you’re over age 50, you can also make catch-up contributions—this year you can save an extra $6,000, for a total of $24,000.

As the employer, you can contribute up to 25% of your earned income—after deducting half of your self-employment tax and the contributions you made to the account as an employee. The employer contribution is always made before tax.

Who it may make sense for
The self-employed 401(k) offers the highest potential contribution limit for self-employed people. The total that can be contributed for employee and employer is $53,000.

The ability to make catch-up contributions may appeal to people over age 50.

Things to be aware of
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 around December 31. In 2016, the last business day of the year is Friday, December 30. 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 IRA is another option for people who are self-employed. Like a 401(k), this account offers tax-deferred 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 less can also open these accounts.

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

• As an employee, you can contribute up to 100% of your compensation, up to $12,500 in 2016.
• As the employer, you can 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 match 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 make sense for
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 for catch-up contributions for those over age 50.

Things to be aware of
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 a lack of an employer plan like a 401(k) stand in your way—pick a retirement plan and start saving.

Learn more

• Read Viewpoints: “Retirement plans for small businesses.”
• Read Viewpoints: “The three A’s of successful saving.”
• Know someone who needs financial guidance? Send them an online learning kit.