We're constantly being reminded about saving for our future.
After all, most of us will never have access to the pensions of our parents' generation. And relying on Social Security isn't exactly a safe bet.
The problem is, many of us don't have access to a 401(k).
As a creative professional, I've only had access to a 401(k) with a match for six months out of the past ten years of my career. It's a lot more common than you might think.
A recent Federal Reserve Report on the Economic Well-Being of U.S. Households found half of survey respondents didn't have a 401(k), 403(b), or employer-sponsored retirement plan.
Shockingly, nearly 40% of respondents earning $100,000 or more indicated they didn't have any type of defined contribution plan.
Before diving into our options, I want to clarify a few points for those with a 401(k) and company match.
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Employer Offer a Retirement Plan? Contribute at Least Up To Their Match
For companies that do offer a retirement plan match, the average is 4.5% of the employee's salary. This is additional compensation (read: free money!) you'll absolutely want to take advantage of if possible.
After contributing up to your employer's full match, here's what you'll want to think about next:
- What are your short-term and medium-term life goals? These may include buying a home, paying for graduate school, or having children. Funneling all of your extra money into a 401(k) might not make sense if you're going to need access to those funds before retirement.
- Are you satisfied with the cost of your 401(k)? In an ideal world, we'd all have access to low-cost index funds, but that's often not the case. It's not always easy to figure out how much your 401(k) investments are costing you. A free tool like Personal Capital's Fee Analyzer can quickly identify these for you. Also, many employers pass the cost of administrative fees along to their employees. You'll want to keep an eye of both of these expenses.
- Have you considered the tax implications? The maximum annual 401(k) contribution is currently $18,000 if you're under 50, and $24,000 if you're 50 or older. These contributions are tax-deferred, meaning you contribute pre-tax, but you'll pay taxes upon withdrawal. By contributing to a 401(k), you're reducing your taxable income for that tax year. A financial planner or tax professional can help you determine the best move for you.
Save with a Roth IRA
If you don't have access to an employer-sponsored retirement vehicle, a Roth IRA is an excellent option to consider.
Here are some important facts:
- You can contribute up $5,500 of earned income per year ($6,500 if you're 50 or older).
- You can't deduct contributions, but withdrawals after 59 1/2 are tax-free.
- Because of the tax-free withdrawals, Roth IRAs can be especially appealing if you predict you'll be in a higher tax bracket by retirement.
- Your modified adjusted gross income must be less than $117,000 if you're single or $184,000 if you're married and filing joint tax returns.
- You can withdraw your contributions anytime without taxes or penalties, but if you withdraw investment earnings before 59 1/2, you will pay both taxes and a 10% penalty.
Because of the low contribution limit, Roth IRA earnings alone probably won't be sufficient to cover your entire retirement. But it can be an excellent source of tax-free income once you've reached 59 1/2.
The easiest way to save is by setting up automatic, monthly contributions. Even if you can't afford $458.33 per month, it's still worth enrolling in automatic monthly deductions through your employer or investment company. $25 per month is better than nothing.
Save with a Simplified Employee Pension (SEP) IRA
If you're self-employed or a small business owner, you may want to consider a simplified employee pension (SEP).
Here's what you need to know:
- These accounts can easily be set up through a bank or investment company. SEP IRAs don't have the startup and operating costs of a conventional retirement plan.
- Small business owners or self-employed individuals can contribute up to 25% of their net income.
- The maximum contribution limit is $53,000.
- SEP contributions are tax-deductible and tax-deferred, so you'll have to pay taxes upon withdrawal.
- The deadline for opening and funding an SEP IRA is your tax return's due date in April.
Save with a Solo 401(k)
A solo 401(k) is another popular option if you're self-employed with no employees or own a company with your spouse. Lower earners may find this option attractive because you can save more at lower income levels than an SEP IRA.
Here's what else you need to know:
- You can save more than a workplace 401(k) because you're allowed to act as both the employee and employer.
- You can contribute 100% of your earnings up to $18,000 if you're an employee ($24,000 if you're 50 or older).
- On top of this, you can contribute up to 20% of net earnings from self-employment.
- Your combined contributions can't exceed $53,000.
- You must open an account and make contributions by December 31st.
Save with a Taxable Investment Account
Once you've maxed out your contributions for other retirement accounts, you can invest in a taxable investment account. You won't be able to defer taxes with this account, but it's a flexible place to invest extra money.
You can easily withdraw both contributions and earnings, but you'll have to pay capital gains taxes on investments when you sell them.
Brokerage accounts can easily be opened through online platforms, banks and credit unions, or through a financial planner.
Just Start Saving Now
Regardless of which type of account you choose, it's important to start saving as soon as possible. The key to a growing a healthy retirement portfolio isn't necessarily earning a high income—it's consistently saving and investing.
Readers: Do you have access to an employer-sponsored 401(k)? If not, how are you saving for retirement?