Find out how to invest if your employer doesn't offer a plan.
Today’s topic is what you should do if your employer doesn’t offer a retirement plan.
A listener named Tiffany called in with this question:
Hi Money Girl. My name is Tiffany and I’m calling with a question. My question is if you already have an IRA and your company does not offer a 401(k), what’s the next best way to start saving for retirement? Thank you.
Thanks for the question, Tiffany.
An IRA Is the Place to Start
Because your employer doesn’t offer a retirement plan, putting money away into an IRA is a smart thing to do, especially if you’re eligible for a Roth, which is tax free, or tax-deductible contributions to a traditional IRA. It’s smart to make use of these tax-advantaged ways to invest for retirement.
Now, in your case Tiffany, it sounds like you’re already contributing the maximum to an IRA, which is great. So where should you look next?
Save Outside of a Tax-Advantaged Plan
Beyond a tax-advantaged IRA, you’ll want to save and invest through a regular brokerage account. While you won’t get the tax advantages you get with a 401(k) or IRA, you’ll have a wide range of investment choices available to you, and you can still invest in a tax-efficient way.
Before beginning to invest with a brokerage account, be sure to first put away at least three to six months’ worth of living expenses in an emergency fund. Also consider your other financial goals and how your retirement plan fits into the bigger picture. You may need to balance saving for retirement with other goals such as saving for a down payment on a house. A future Money Girl episode will be devoted to helping you decide whether or not to invest or pay down debt, so please check it out for more on that.
When investing, it’s important to keep your eye on the prize. Saving on taxes is important, but it isn’t everything. That said, one type of investment that’s pretty tax efficient is index funds.
Index funds track a particular market index, such as the S&P 500, which consists of the stock of 500 large companies. With an index fund, the fund manager simply buys and holds the same stocks that are in the index. The management fees are usually extremely low. And, because the manager doesn’t do a lot of trading, the taxable gains distributed to shareholders are typically much smaller than what you’d experience with an actively managed fund.
You actually don’t get a bad tax deal when investing outside of a tax-advantaged IRA or 401(k). In a regular brokerage account, you’ll pay tax on dividends but many stocks don’t pay dividends at all. And as long as you hold a stock or mutual fund for more than a year, you’ll pay capital gains tax at the relatively low rate of 15% when you sell.
Put Your Savings on Autopilot
And here’s one last tip: no matter what type of account you use to save for retirement, put your contributions on autopilot. Decide how much you want to save and invest each month. A good target is 10% of what you earn. Have this amount automatically transferred into your retirement account. You can set it up so that the money is used to automatically buy shares of a particular mutual fund. You’ll be surprised by how quickly those small, regular contributions can add up.