Everyone knows the importance of saving for retirement. As a rule of thumb, the earlier you start saving, the better it is - thanks to the power of compound interest. Many financial experts' advice their clients to plan for their retirement right from their first paycheck.
Saving for retirement becomes more effortless and natural for employees who work for companies that offer retirement benefit such as 401(k) plan; however, not everyone has access to this benefit.
There are millions of Americans who work for small businesses or start-ups that do not offer retirement options. Moreover, self-employed individuals, freelancers, and small scale business owners do not have access to any retirement plans. Don't let these excuses defer your retirement savings.
As a first step, you should open an individual retirement account (IRA) and contribute money each year up to the allowable limit. IRAs are tax-advantaged accounts, and because of its compounded earnings, it offers similar returns like a company sponsored 401(k) plan.
IRA accounts come in two types – Traditional and Roth. The traditional plan offers tax-deductible contributions while the Roth IRA helps with tax-free withdrawals at retirement. While both the investment vehicles promise to deliver brighter earnings, it is imperative to understand the difference between the two and choose the right one for yourselves. You should calculate your tax liability and then decide between a traditional IRA and Roth IRA. If you come under a higher tax bracket at the moment, then you should choose a traditional IRA, however, if you expect to be in a higher tax bracket when you retire, then you must select a Roth IRA.
A SEP-IRA is another excellent way to save money for retirement. Known as "Simplified Employee Pension Individual Retirement Account," it is one of the common kinds of traditional IRA that is eligible for the self-employed, a person with freelance income, small-scale business owners or independent contractors. Business owners with one to two employees or any person with freelance income can easily open SEP IRA to avail retirement benefits for themselves and their employees. Contributions made towards SEP IRA are tax-deductible; however, the withdrawals are taxable. The annual contribution limits are higher with SEP-IRA than a traditional or Roth IRA.
It is a qualified retirement plan specially designed for business owners with no full-time employees or self-employed individuals. This plan covers both you and your spouse. Solo 401(k) follows similar features and rules of an employer-sponsored plan or individual 401(k) plan except that is eligible for a business owner. According to the IRS, you can make contributions to Solo 401(k) both as the employee and employer.
Many people accept employment offers from companies that do not offer retirement benefits is to gain experience. Also, some start-ups may give you stocks as an incentive instead of providing a basic retirement plan or may promise to provide a retirement benefit to those employees who stay on-board with the company for more than two years.
In such a case, you may want to initiate a discussion around retirement benefits and see if the employer is keen on considering your offer. If there seems to be no change in the employer's plans, then you may want to look out for a job that offers these benefits. It is essential to look for a reputed and well-established organization that provides various benefits, including a retirement plan and help you save money without much hassle.
This approach is often underrated when it comes to investing money for the future because they are fully taxable, unlike traditional retirement plans. However, it can be beneficial if you choose to invest wisely on stocks, bonds, mutual funds over a long-term period and take advantage of the market returns.
Keep in mind that the right asset mix will balance your retirement timeline and your comfort with risk. Learn the pros and cons of investing money in the market and invest your money depending upon your risk tolerance, liquidity needs, time horizons, and retirement goals. Take help from a qualified professional or financial advisor who will use their knowledge and wisdom to build a diversified portfolio based on your priorities.
| Where to invest when your job has no 401(k) Plan | |
| Traditional IRA |
Anyone can use traditional IRA |
| Roth IRA |
Employees with low earnings and who expect to be in a higher tax bracket during retirement |
| SEP-IRA |
Self-employed, people with freelancing income, contractual employees |
| Invest in stocks or brokerage account |
Investors looking for flexibility and can invest beyond their annual contribution limits |
| One participant / Solo 401(k) |
Especially for business owners with no full-time employees |
Planning your retirement can be time-consuming and tedious, but the most crucial first step is to figure out the right plan and start saving which will substantially boost your future retirement income helping you reach your goals faster.
Remember that even if you have access to an employer-sponsored plan or 401(k), it is always a great idea to explore other investment vehicles in order to maximize your earnings and tax savings opportunities. It does not take a lot to start building that nest egg provided you have a strategic plan.
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