Retirement Investment Strategies For Those Without Employer Plans

If your employer doesn't offer a 401(k) retirement plan, there are still several options for investing in your retirement. These include opening a traditional or Roth individual retirement account (IRA), a brokerage account, a Simplified Employee Pension (SEP) IRA, a SIMPLE IRA, or a solo 401(k). Each of these options has different advantages and disadvantages, such as tax benefits, contribution limits, and flexibility. It's important to start saving for retirement as early as possible to take advantage of compounding interest, even if you can only save small amounts.

Open an individual retirement account (IRA)

If your employer doesn't offer a retirement plan, you can still save for your retirement by opening an individual retirement account (IRA). IRAs are long-term, tax-advantaged savings accounts that individuals with earned income can use to save for the future. They are specifically designed for self-employed people who don't have access to workplace retirement accounts, but anyone with earned income can open and contribute to an IRA, even if they have a 401(k) plan through their employer.

IRAs are meant to be used to invest and maximize the growth of funds for retirement savings. The two most common types of IRAs are Traditional and Roth. Traditional IRAs are tax-advantaged personal savings plans where contributions may be tax-deductible. With a traditional IRA, you put tax-deductible money in today, then pay the taxes on whatever you withdraw when you retire. In 2023, the maximum annual individual contribution to traditional IRAs is $6,500. For 2024, the maximum annual individual contribution is $7,000.

Roth IRAs are also tax-advantaged personal savings plans, but contributions are not tax-deductible. Instead, with a Roth IRA, you pay taxes on contributions now, and then get to withdraw the money tax-free. There are income limits on those who are eligible to use a Roth IRA. For 2023, your income must be below $153,000 for a single filer and below $228,000 for a married couple.

You can open an IRA through a bank, an investment company, an online brokerage, or a personal broker.

Invest in a brokerage account

A brokerage account is an investment account that you can open directly with a bank or brokerage firm. It allows you to buy and sell various investments, such as stocks, mutual funds, bonds, and ETFs. Brokerage accounts are usually recommended after you've maxed out your contributions to tax-advantaged retirement accounts like 401(k)s and IRAs because they don't offer the same tax benefits.

• Tax implications: Brokerage accounts are typically taxed differently from retirement accounts. You won't get tax breaks on contributions, and you'll pay taxes on any capital gains, dividends, and interest earned. These taxes can be complicated, so consider consulting a tax advisor.
• Flexibility: Brokerage accounts offer more flexibility than retirement accounts. There are no contribution limits, and you can withdraw money at any time without penalties.
• Types of accounts: There are two main types of brokerage accounts: full-service brokerage accounts, which provide financial guidance (usually for a fee), and online brokerage accounts, which are typically do-it-yourself and have lower fees.
• Opening an account: Opening a brokerage account is a straightforward process. You can compare different brokerage firms, choose the type of account you want, fill out an application, and fund the account.
• Investments: With a brokerage account, you have a wide range of investment options, including stocks, mutual funds, bonds, and ETFs.
• Considerations: While brokerage accounts offer flexibility, they lack the tax advantages of retirement accounts. It's generally recommended to prioritize maxing out tax-advantaged accounts before contributing to a brokerage account.

Open a health savings account

If you have a high-deductible health plan through your employer, you can open a health savings account (HSA) and put pre-tax money into it. HSAs are intended to be used to cover health care expenses, but they can also be used to fund other expenses in retirement.

Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. HSA contributions also carry over from year to year, so you don't have to worry about losing them if you don't use them within a certain timeframe.

In 2024, the contribution limits for HSAs are $4,150 for individuals and $8,300 for families. If you're 55 or older, you can make an extra catch-up contribution of $1,000 per year.

While an HSA can be a great way to save for retirement, it's not a substitute for a 401(k) plan or an individual retirement account (IRA). It's important to consider the tax implications of using an HSA for retirement, as withdrawals for non-medical expenses before the age of 65 are subject to a 20% tax penalty and regular income tax. However, once you turn 65, you can use your HSA for any purpose without penalty, although non-qualified withdrawals are still taxable as income.

Set up a solo 401(k)

Setting up a solo 401(k) is a great option for self-employed individuals and small business owners with no full-time employees. Here is a step-by-step guide on how to set up a solo 401(k):

Step 1: Determine Eligibility for a Solo 401(k)

To be eligible for a solo 401(k), you must be a business owner with no employees. This includes small business owners and self-employed individuals. You can also include your spouse in the plan. However, you cannot have any full-time employees apart from yourself and your spouse.

Step 2: Find a Solo 401(k) Provider

The next step is to choose a solo 401(k) provider that can help with regulatory paperwork. Some factors to consider when choosing a provider include costs, level of management, and investment flexibility.

Step 3: Gather Documents Needed to Open a Solo 401(k)

To open a solo 401(k) account, you will need to gather and provide several important documents:

• Employer Identification Number (EIN)
• EIN for Solo 401(k)
• Beneficiary Information
• Personal Identification
• Bank Account Information

Step 4: Open Solo 401(k) Account

Once you have chosen a provider and gathered the necessary documents, you can proceed to open your solo 401(k) account. It is best to open the account before the tax-filing deadline of April 15th.

Step 5: Fund Your Solo 401(k)

You can fund your solo 401(k) account through monthly contributions or a lump-sum payment. The IRS allows you to contribute up to $20,500 from your salary if you're younger than 50, and up to $27,000 if you're 50 or older. As the employer, you can contribute up to 25% of your net self-employment income.

The total contribution limit for a solo 401(k) as both employer and employee is $66,000 for 2023 and $69,000 for 2024. People aged 50 and above can add an extra $7,500 as a "catch-up contribution".

Open a SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a retirement savings plan that allows both employers and employees to contribute to traditional IRAs set up for employees. It is a good option for small businesses with 100 or fewer employees, each of whom earned at least $5,000 in the previous year.

SIMPLE IRAs are easy to set up and maintain, with no start-up or operating costs. They are also inexpensive, with no account fees or minimums to open an account.

• Choose a financial institution: You need to select a financial institution, such as a bank or an insurance company, to serve as the trustee of the SIMPLE IRAs and hold each employee's retirement plan assets.
• Execute a written agreement: You must execute a written agreement to provide benefits to all eligible employees. This can be done using Form 5304-SIMPLE or Form 5305-SIMPLE, which are model Savings Incentive Match Plan documents. Alternatively, you can use a prototype document provided by a mutual fund, insurance company, bank, or other qualified institution.
• Notify employees: You must notify each eligible employee of their opportunity to make or change salary reduction choices, their ability to select a financial institution, your decision on matching or nonelective contributions, and a summary description of the plan. This notification must be provided before the beginning of the election period, which is generally the 60-day period before January 1 of a calendar year.
• Set up a SIMPLE IRA for each eligible employee: A SIMPLE IRA must be established for each eligible employee, and all contributions to the plan must go into this account. Financial institutions authorized to hold and invest SIMPLE IRA plan contributions include banks, insurance companies, federally insured credit unions, and brokerage firms.
• Make contributions: Employee contributions are deducted from their salaries, and employer contributions are mandatory. Contributions can be invested in stocks, mutual funds, and other similar types of investments.
• Provide annual statements: You will need to give each participating employee an annual statement indicating the amount contributed to their account for the year.
• Comply with withdrawal rules: SIMPLE IRA contributions and earnings can be withdrawn at any time but are subject to taxes and penalties if withdrawn before the age of 59 1/2. There are certain exceptions, such as higher education expenses, first-time home purchase expenses, and certain medical expenses, that allow for penalty-free withdrawals.
• Maintain and terminate the plan: SIMPLE IRA plans must be maintained for a whole calendar year, and you cannot terminate the plan in the middle of the year. If you decide to discontinue the plan, you must notify your employees and the financial institution in advance.

Frequently asked questions