Retirement Planning Without An Employer: Navigating Your Investment Options

If your employer doesn't offer a retirement plan, you're not alone. In fact, nearly one-third of all workers don't have access to an employer-sponsored retirement savings plan. But that doesn't mean you can't save for retirement. There are several options available to help you build your retirement fund, such as solo 401(k)s, IRAs, health savings accounts, and more. These options can offer tax advantages and investment opportunities to help you save for the future.

Solo 401(k)

A solo 401(k), also known as a one-participant 401(k), is a retirement savings account specifically designed for self-employed professionals and small business owners without full-time employees. It allows entrepreneurs who don't have access to employer-sponsored plans to enjoy the benefits of a 401(k).

With a solo 401(k), you can make contributions as both the employee and the employer. As the employee, you can contribute a maximum of $23,000 in 2024 $22,500 in 2023 or 100% of your compensation, whichever is less. If you're 50 or older, you can contribute an additional $7,500. As the employer, you can contribute up to 25% of your compensation or net self-employment income. The total contribution limit for a solo 401(k) is $69,000 in 2024 ($66,000 in 2023).

Types of Solo 401(k)

There are two types of solo 401(k)s:

• Traditional 401(k): Contributions are made pre-tax, reducing your taxable income for the year. Taxes are paid when you withdraw the money in retirement.
• Roth 401(k): Contributions are made with after-tax dollars, so there is no immediate tax benefit. However, qualified distributions in retirement are tax-free.

Who Is Eligible?

To be eligible for a solo 401(k), you must be a business owner with no full-time employees, other than your spouse. Your spouse can also be included in the plan, which is one of its biggest tax advantages.

How to Open a Solo 401(k)

You can open a solo 401(k) at many online brokers or financial institutions that administer 401(k) plans. You will need an employer identification number. The process typically involves completing an application and providing proof of self-employment and identification. It's important to research and compare different providers to find one that aligns with your financial needs and goals.

Additional Considerations

When deciding how much to contribute, consider your other financial goals and priorities. For example, building an emergency fund or paying off high-interest debt may take precedence over maximizing your retirement contributions. Consulting a financial advisor can help you navigate the complexities of retirement planning and optimize your savings strategy.

Traditional IRA

A traditional individual retirement account (IRA) is a tax-advantaged way to save for retirement. With a traditional IRA, you can contribute pre-tax or after-tax dollars, and your contributions may be tax-deductible depending on your situation. This gives you immediate tax benefits.

The money in your traditional IRA can grow tax-deferred, but you will pay ordinary income tax on your withdrawals, and you must start taking distributions after age 73. There are no income limitations to opening a traditional IRA, but there are annual contribution limits. For 2023, you can contribute up to $6,500 annually ($7,500 if you're 50 or older), and for 2024, the limit is $7,000 ($8,000 if you're 50 or older).

One of the main perks of a traditional IRA is that it gives you the opportunity to save for retirement with tax-free growth. You won't pay any tax on the dollars you invest or the interest you earn until you withdraw money from the account. Additionally, you can set up a direct deposit from your paycheck to a traditional IRA, just like with a 401(k).

When comparing a traditional IRA to a Roth IRA, the contribution limits are the same, but the taxation is different. With a traditional IRA, your contributions are made with pre-tax dollars, and you'll pay taxes on the withdrawals in retirement. With a Roth IRA, your contributions are made with after-tax dollars, and qualified distributions are tax-free.

A traditional IRA may be a good option for those who expect to be in the same or lower tax bracket in the future. It's important to consider your financial situation and future expectations to determine which type of IRA is more suitable for you.

Roth IRA

A Roth IRA is a type of tax-advantaged individual retirement account (IRA) that allows you to contribute after-tax dollars toward your retirement. The primary benefit of a Roth IRA is that your contributions and the earnings on those contributions can grow tax-free and be withdrawn tax-free after age 59 1/2, assuming the account has been open for at least five years. In other words, you pay taxes on money going into your Roth IRA, and then all future withdrawals are tax-free.

A Roth IRA is a special individual retirement account (IRA) where you pay taxes on money going into your account, and then all future withdrawals are tax-free. This is advantageous if you think your marginal taxes will be higher in retirement than they are now.

Single filers can’t contribute to a Roth IRA if they earned more than $153,000 in 2023. For married couples filing jointly, the limit is $228,000 for 2023. In 2024, the contribution limits increase to $161,000 and $240,000, respectively.

The amount that you can contribute changes periodically. In 2023, the limit increased to $6,500 (plus the additional $1,000 for those 50 and older). In 2024, the limit increases again to $7,000 with the catch-up contribution remaining at $1,000.

Almost all brokerage firms, both brick-and-mortar and online, offer a Roth IRA. So do most banks and investment companies.

To open a Roth IRA, you will need to provide some basic information, including your social security number, employer's name and address (if applicable), statement information for any assets or cash you'd like to transfer, and beneficiary information.

There are some downsides to a Roth IRA. Firstly, it does not include an upfront tax break. Secondly, annual contribution limits are about a third of 401(k)s. And for some high-income individuals, contributions are either reduced or not allowed.

Health Savings Account (HSA)

A Health Savings Account (HSA) is a type of savings account that allows you to set aside money on a pre-tax basis to pay for qualified medical expenses. By using untaxed dollars in an HSA, you may be able to lower your out-of-pocket health care costs. HSA funds generally may not be used to pay premiums.

To be eligible for an HSA, you must have an HSA-eligible plan, sometimes called a High Deductible Health Plan (HDHP). This is generally a health plan that only covers preventive services before the deductible. An HSA may earn interest or other earnings, which are not taxable. Banks, credit unions, and other financial institutions offer HSAs.

HSAs are tax-advantaged, member-owned accounts. This means that you can save pre-tax dollars for future qualified medical expenses. You can also invest in mutual funds tax-free, and funds never expire.

If you have a high-deductible health plan on your own, not offered through an employer, you can sign up for an HSA right now.

Taxable Investment Account

A taxable investment account is a way to buy and sell various assets, such as stocks, bonds, and exchange-traded funds. These accounts can be opened at online brokers or with the help of a robo-advisor. The custodian of the securities in the account is usually the firm that provides it.

The "taxable" aspect of the account means that any dividend income or profits from the sale of assets must be reported to the IRS for tax purposes. Depending on the duration of ownership, profits may be taxed at the normal income tax rate or a long-term capital gains tax rate. Dividends generally fall into the latter category, regardless of how long the owner has held the stock.

Compared to a 401(k) or an IRA, which protect money and assets from taxes, taxable investment accounts offer more flexibility. They have fewer restrictions and allow individuals to access their investments at any time, without age restrictions. This makes them ideal for goals that are a few years down the line.

When considering a taxable investment account, it is important to be mindful of the fees and how interest, dividends, and capital gains are taxed. Consulting a financial advisor or tax professional is always recommended to ensure that individuals are making informed decisions about their investments and understanding the tax implications.

Frequently asked questions