How to Save for Retirement Without a 401(k)

Use alternative accounts to save for retirement when you don’t have a workplace 401(k).

Laura Adams, MBA
5-minute read
Episode #180

Workplace retirement plans, like 401(k)s and 403(b)s, are fantastic ways to save for retirement. But what if you don’t have access to one? In this post I’ll tell you what options you do have to build a secure financial future and how you can successfully save for retirement without a 401(k).

How to Save for Retirement Without a 401(k)

Many people don’t have the option to invest in a retirement account at work. That might be the case if you’re between jobs, are self-employed, work for a small business that doesn’t offer benefits, or are a stay-at-home spouse, for instance. Well, don’t let that stop you from reaching your retirement dreams! Thankfully, there are other types of accounts that you can use to achieve your long-term financial goals.

What Is an IRA?

No matter your situation, just about everyone can contribute to an IRA, or Individual Retirement Arrangement—that’s why I consider it the cornerstone of retirement savings. An IRA is a personal savings plan that has nothing to do with your work; you open it, fund it, and control it yourself. The only requirement to contribute to an IRA is that you have some amount of earned income or have a spouse with earned income. (For more on IRAs, see my article, What Is the Difference Between a Traditional and Roth IRA?)

How Much Can You Contribute to an IRA?

An IRA is a personal plan that has nothing to do with your work; you open it, fund it, and control it yourself.

The amount of money you can contribute to an IRA is based on your age and income. You can contribute an amount that matches your taxable compensation up to $5,000 or $6,000 if you’re age 50 or older, for 2010. For example, if you’re 18 years old and make $4,000 from a part-time job this year, the maximum amount that you can contribute is $4,000—not $5,000. But even if you make $500,000, the most you can contribute is $5,000 (or $6,000 if you’re 50 or older). If you don’t work, but you have a spouse that works, you can fund a spousal IRA using their income. As long as you’re married and file a joint tax return, both you and your spouse can max out your IRAs every year, even with one income.

How Does Money in IRA Grow?

The money you contribute to an IRA is allocated among the investments that you choose, like stocks, bonds, mutual funds, and exchange-traded funds. If you’re young, growth stock funds will allow your money to multiply as aggressively as possible over the years. On the other hand, if your retirement is less than ten years away, choose more conservative and less risky investment options, like bond funds or money market funds. 

How Do You Open an IRA?

It’s super easy to open up an IRA—just complete an application at an online brokerage, fund company, or bank. You can usually set one up to draft automatic contributions from your checking account for free. Here are some great places to get started:

After you set up your IRA, if you’re not sure what investments are right for you, don’t be shy about contacting the company’s financial services department to speak with a representative or broker about your options.

How to Save for Retirement if You’re Self-Employed

If you’re self-employed or have your own company, there are even more ways to save for retirement, in addition to an IRA. A “self-employed” person is someone who’s in business for themselves (either full- or part-time) and has an unincorporated business. In this article I’ll discuss two of the best types of retirement plans to set up and maintain if you’re self-employed or have a small company: the SEP and the SIMPLE plan.

What Is a SEP Retirement Plan?

A SEP, or Simplified Employee Pension Plan, is also known as a SEP-IRA. It allows employers to make pre-tax contributions to a traditional IRA for each of their eligible employees. SEPs don’t allow employees to contribute; they can only be funded by employer contributions. But it allows individuals who are self-employed to make contributions to their own retirement account. If you’re a one-man operation or have just a few employees, a SEP will be the easiest retirement plan for you to set up and maintain. You can even have a SEP for your self-employment income if you have another job where you participate in an employer’s retirement plan.

The SEP rules allow you to contribute any amount you like, up to 25% of your salary if you’re an employee of your own company, or up to 20% of your net self-employment income. These percentages are capped at a maximum contribution of $49,000 for 2010. If you employ workers, you must offer the SEP to all eligible employees and fund it in an amount that’s equally proportional to their wages. To set one up, simply submit IRS Form 5305-SEP.

What Is a SIMPLE Retirement Plan?

The second retirement plan that I mentioned is the SIMPLE, which stands for Savings Incentive Match Plan for Employees. It’s available to the self-employed and to businesses with less than 100 employees. It can be set up as either an IRA or a 401(k) and is funded by both employer contributions and employee salary deferrals. For 2010 an employee can contribute up to $11,500 or up to $14,000 if they’re at least 50 years old. An employer with a SIMPLE must choose to make matching contributions of at least 3% or to make non-elective contributions of 2% of each eligible employee’s compensation.

A SIMPLE is a great option when your company begins to grow and add employees; however, it may have more restrictions and entail more recordkeeping than you really want if you’re a sole proprietor. A SIMPLE also has restrictions on how much you can contribute if you also participate in a retirement plan at a different employer. See IRS Publication 560 for instructions on how to set up a SIMPLE plan.

Use a Taxable Brokerage Account to Save for Retirement

A quick and dirty tip is that if you’re not self-employed and you don’t qualify for an IRA, you can always invest for your retirement in a taxable brokerage account. Complete an online application at one of the Web sites that I mentioned earlier, and start growing your retirement nest egg as soon as possible.

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Connect with Money Girl

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More Resources:

Choosing a Retirement Solution for Your Small Business

IRS Publication 560, Retirement Plans for Small Business

Image courtesy of Shutterstock

About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.