I have been fortunate in my career to always have been offered a 401(k) – or similar program – by my employers, and to be honest, it would be hard to switch to a company who didn’t offer one. I love my 401(k), especially since it was one of the major players in helping me hit a $250K net worth this summer, and I continue to take advantage of it like QVC takes advantage of old women with cash in their pocket.
For those of you who are reading this and thinking, “Wtf is a 401(k)?”, it’s essentially a program your employer can provide that offers tax benefits for your retirement savings. A majority of the time, employers make it more attractive by offering to match a portion of the contributions you make to the plan as well, so you’re getting two huge legs up in the world of retirement savings. Double high-five.
For instance, let’s say your employer offers a traditional 401(k) and matches contributions up to 5% of your income. If you’re making $50,000 per year, that means they will contribute $1 for every $1 you put in the plan, up to $2,500 ($50,000 x 5%). You’re automatically doubling your money, a hard feat in the world of investing, so it’s a freaking FABULOUS deal.
But on top of that, your contributions are also pre-tax, meaning you don’t have to pay tax on the money you put into or earn in the account until you take it out during your retirement years. So that entire $2,500 you’re contributing is actually being invested instead of a portion of it going straight to the tax man. It’s a huge bonus because you’ll have a higher amount to initially start investing, which could mean more earnings. See why it’s so great?
However, while it seems like 401(k)s are more popular than Instagram pics of Starbucks cups, the data shows otherwise. In fact, over 31% of American households don’t have access to a plan like a 401(k) to save for retirement. Yikes.
Thus, I’ve put together retirement savings strategies for those of you who are either a) not offered a plan by your employer or b) self-employed. Even without a 401(k), you have plenty of options, and I’ve laid them all out for you.
THOSE WITH THE SUCKY BOSSES
Ok, first a disclaimer: Just because your employer doesn’t offer a retirement plan doesn’t mean they are a sucky boss. It was just such a catchy header, I couldn’t not write it. So please don’t comment on this below. Moving on.
If your employer doesn’t offer a 401(k), it may seem like you’re going to be way behind in the retirement game, but that isn’t necessarily the case. Here’s your strategy for high-tailing it to retirement.
CONTRIBUTE UP TO THE MAX IN A ROTH IRA
A Roth IRA is essentially a folder that houses your investments, and it has one ENORMOUS benefit:
All of your earnings are tax-free. Forever.
That’s right. Every stinking penny you earn will be yours and all yours no matter what. The only catch is that unlike your traditional 401(k)s, you are contributing post-tax dollars, meaning Uncle Sam is going to take his cut before you’re allowed to start investing that money. Whomp whomp.
However, this isn’t disastrous, especially if you’re young and at the lowest income point in your career. When you have a lower income, it means you’re paying lower taxes, so while the government is taking a cut now, it will more than likely be much less than the cut he’ll take when you’re making more later. I personally still contribute up to the max each year and will until I’m no longer eligible because yes, there are contribution limits.
Each year, you are allowed to contribute up to $5,500 per individual (so $11,000 total if you’re married) to a Roth IRA if you claim less than $118,000 ($186,000 married filing jointly) in adjusted gross income on your tax return. At that point, you can still partially contribute until you hit $133,000 ($196,000 married filing jointly), which then means you are no longer eligible.
The good(ish) news is that if you’re above those income limits, you’re not only making bank but you can also still invest in a traditional IRA, which operates like a traditional 401(k) in that you make contributions with pre-tax dollars and have to pay tax whenever you actually take the money out in retirement. The only catalyst here is that if your spouse is covered by an employer’s plan and you claim $186,000+ in income combined, you could be limited on getting the tax benefits of a traditional account.
I know, the government makes this confusing. However, I’ve created an easy flow chart below to help you figure out where you should be putting your money. Use it to find what works best for you, and contribute up to that max.
For more on backdoor Roth IRA contributions, visit here.
START DIVERSIFYING DIRECTLY INTO THE MARKET
Unfortunately, investing in a Roth IRA or traditional IRA are the only tax-advantaged plans you’ll have available. From there, you’ll have to invest into the market directly, and you can do this in a multitude of ways. Choose which fits best for you, and once you’ve hit the contribution limit on your Roth/traditional IRA, funnel money into it.
Stocks, Bonds, Mutual Funds
You can open your own online brokerage account with a site like TD Ameritrade or Betterment and invest directly into stocks, bonds, or mutual funds. Again, you won’t get any tax benefits with this, but that’s not a reason to stop investing.
I’ve started to dip my toes in this realm this year, and I wish I would have done it sooner. Investing in real estate, whether that’s through rental properties or home flips, is time-consuming and can require a lot of money upfront. However, it can also provide you with some solid cash flow opportunities, both now and in the future. If you’re interested, I highly recommend checking out Bigger Pockets – it’s my go to for anything and everything real estate investing (and their calculators are PRICELESS).
If you don’t have the time or money to invest directly in the market, you could instead invest in REITs (or real estate investment trusts). These act similar to mutual funds only instead of stock or bond investments, they are investing in income-producing real estate. You can purchase these just like mutual funds through your brokerage account.
There are other ways to invest directly in the market besides the two I just mentioned, but I feel these are the more prevalent and easy to understand options. Again, invest in these only after you max out your IRA contribution, and you’ll be on your way to some wonderful golden years.
THOSE WHO ARE THEIR OWN BOSSES
Oh, hey boss ladies. If you are a freelancer or own your own business, you have a few more options than those working for someone else without a retirement plan, and let me tell you, they are LEGIT.
THE SELF-EMPLOYED 401(K) EQUIVALENT
Luckily for the self-employed, the government decided to throw you a bone (or 3) and set up plans similar to the 401(k). Each has its own pros and cons, so please read through each carefully and decide which is the best fit for you.
Who Qualifies: Individuals who own their own business (even if they have a full-time job!) in a sole proprietorship, partnership, S-Corp, or C-Corp
The Basics: This acts as a traditional IRA where you don’t get taxed until you take money out of the account in retirement. However, note this is different than a regular 401(k) in that only the employer can make contributions to the retirement plan, not the employee.
Why It Rocks: You can contribute much more to this than a regular traditional IRA, which is capped at $5,500 per year. Under a SEP IRA, you can contribute up to 25% of your income or $54,000 (2017 limit), whichever is less. Thus, if you make $50,000, you can contribute $12,500 each year.
Why It Can Suck: If you have employees, you must set plans up for them as well and contribute the same percentage across the board.
Who Should Use It: Those with a handful of employees they would like to offer a retirement benefit to
Who Qualifies: Those who are self-employed or who own a business/partnership with no employees
The Basics: Both the employee and employer can make contributions to this plan, which can act as either a traditional (tax-deferred) or Roth (post-tax) fund. Employees are capped at $18,000 per year (2017 limit) while employers cannot contribute more than 25% of their earned income.
Why It Rocks: It has the same maximum annual contribution limit as the SEP IRA of $54,000 (2017 limit), but you have a higher likelihood of achieving it because both the employee and employer can contribute. If you’re over 50, you also have the ability to make catch-up contributions (something not offered with the SEP) of an additional $6,000 per year.
Why It Can Suck: Paperwork. If the retirement plan assets get over $250,000, then you have to file an extra tax form with the IRS (Form 5500).
Who Should Use It: Those with no employees or who are older than 50
Who Qualifies: Those who are self-employed or have small businesses with fewer than 100 employees
The Basics: Just like a self-employed 401(k), both the employee and employer can contribute money to the plan, which can act as a traditional (tax-deferred) or Roth (post-tax) fund. Employer portions are limited to a 3% matching contribution or a 2% non-elective contribution (meaning they give it to everyone, regardless of whether they choose to participate or how much they put in).
Why It Rocks: For small businesses with less than 100 employees, it’s a great alternative to putting a 401(k) in place
Why It Can Suck: Employee contributions are limited to $12,500 per year, which is significantly less than the maximum you can contribute under the SEP IRA or Self-Employed 401(k).
Who Should Use It: Those with small businesses that have between 10 & 100 employees
CONTRIBUTE THE MAX TO YOUR ROTH IRA
Alright, you’ve got your company plan in place. Now what?
Well, take a good luck at your business and see how much you want to contribute through one of the three previously-mentioned options. Because any contributions you make on behalf of the company are tax-deductible, you may want to funnel quite a bit through one of these self-employed plans. If you’re in the 25% tax bracket, a $10,000 employer contribution will save you $2,500. Not too shabby, right?
When you reach the contribution limit of what your business can support or the threshold the law dictates, your next move is to contribute up to the max in your Roth IRA.
Because this is entirely separate from what you do within the company, what you contribute to your business-sponsored plan has no effect on the amount you can put in your Roth IRA. Thus, you have the opportunity to invest an additional $5,500 (2017 limit) in the market. Um, yes please.
And there you have it: the best investment strategies you can use to build a brighter future without having a 401(k). It’s surprising how many options are actually out there for you to take advantage of, isn’t it? Shout out to Uncle Sam for not forgetting about the hustlers.
As always, if you have any questions, feel free to shoot me an email or ask away in the comment section below. And for all of you that don’t have access to a 401(k), inquiring minds (i.e. me) would love to know: What options are you currently taking advantage of to save for retirement?