How To Save For Retirement Without a 401(k)

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.

Disclosure: This post may contain affiliate links. 

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? 

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Discussions — 26 Responses

  • Holly Johnson July 11, 2016 on 7:25 am

    Since we are self-employed, we use a Solo 401(k). It allows us to contribute quite a bit each year across two accounts, and it’s easy to track through Vanguard’s website. I do miss my employer match from my old job, but it’s still not that hard to save for retirement on your own,

    • Kate Dore Holly Johnson July 17, 2016 on 9:31 am

      Nice, Holly! Thanks for the recommendation. I’ll have to dig further into the Solo 401(k) option once the time comes.

  • Josh July 11, 2016 on 9:40 am

    I’m surprised the availability of 401(k)s was that low. For the last year, I have been self-employed so we have been contributing to a Roth IRA. Once our income levels return to a replaceable level & we pay off some debt, I hope to do a solo 401(k) or something similar.

    • Kate Dore Josh July 17, 2016 on 9:30 am

      That’s fantastic, Josh. Maxing out your Roth IRA during your first year of self-employment is really impressive!

  • Jen@FrugalSteppingStones July 11, 2016 on 11:58 am

    I had a 401K available to me until a year ago when I dropped from full time nurse to a contract position in order to get fewer hours and more flexibility. I started setting aside money every month from my pay to help fill a Roth IRA, and opened one through Vanguard. It was easy as pie to get one started. I can’t afford to do more than a maxed out Roth until next year, so I’m trying to educate myself about the best options for further investing now. I want to retire early, so I’m not sure a Solo 401K will be my best bet.

    • Kate Dore Jen@FrugalSteppingStones July 17, 2016 on 9:29 am

      That’s great, Jen! It sounds like you’re making some smart moves. I’ve thought about early retirement, too. It’s part of the reason I haven’t dumped all of my assets into retirement accounts.

  • Brian @ Debt Discipline July 11, 2016 on 12:24 pm

    We have a little bit of everything. A tradition 401k with employer match, a rolled over 401K and a pension. Totally agree with you and sooner you can begin saving the better. Advice I’m passing along to my children.

    • Kate Dore Brian @ Debt Discipline July 17, 2016 on 9:28 am

      That’s fantastic, Brian! I’m really grateful my father encouraged me to open a Roth IRA at 18. Even though I wasn’t able to contribute much for several years, it was definitely helpful.

  • Joe July 11, 2016 on 6:57 pm

    I’m going with the i401k at Vanguard. It’s really simple and I can save a huge chunk of my self employment income. It’s been doing very well so far.

    • Kate Dore Joe July 17, 2016 on 9:27 am

      Nice, Joe! Thanks so much for the suggestion. I’ll have to check that one out! 🙂

  • Stefanie O'Connell July 12, 2016 on 8:26 am

    I’ve been working on a story about this too and it blows my mind how prevalent the 401k advice is when so many people don’t have access to such a plan. I really hope we start seeing more holistic financial planning advice in the mainstream for those of us living in the new economic landscape where pensions and 401ks are not always the norm.

    • Kate Dore Stefanie O'Connell July 17, 2016 on 9:26 am

      Completely agree, Stefanie! I’ve been wondering the exact same thing for years. I felt pretty clueless for most of my 20s when it came to saving for retirement.

  • MoneyAndMovement July 12, 2016 on 12:59 pm

    Always invest in an IRA or other investments first then use the company 401 until the match then go back to other investments that you control.

    • Kate Dore MoneyAndMovement July 17, 2016 on 9:25 am

      Why do you recommend maxing out an IRA first, MoneyAndMovement?

  • Catherine Alford July 14, 2016 on 10:17 am

    Investing for retirement is important, but it can be hard for some people to do when they are focused on other thing first, like paying off debt or building an emergency fund. I was surprised at how few people have access to a 401(k), but I think it’s a trend that will continue.

    • Kate Dore Catherine Alford July 17, 2016 on 9:23 am

      I think so, too, Cat. Especially as more companies hire contract workers rather than full-time. Many of us may never have access to a 401(k), so I think it’s important to put alternatives in place as quickly as we can.

  • Chonce July 15, 2016 on 8:59 am

    My employer doesn’t offer a 401(k) unfortunately so I opened a Roth IRA and although I’m only contributing a little to it now, I hope to start maxing it out each year as soon as I pay off my debt.

    • Kate Dore Chonce July 17, 2016 on 9:15 am

      Totally understandable, Chonce! I’ve had periods over the past 10 years where I wasn’t able to max out my Roth IRA. But I know contributing even a small amount has made a difference!

  • Dollar Engineer July 17, 2016 on 12:24 pm

    Great post Kate,
    I have access to a 401(k) through my job and I make sure to max out it over the year. Earlier this year I decided to learn more about where that money was going, and realized I had access to a total market stock fund with a fee of only 0.05%! I made sure to switch over to that as soon as possible.

  • FinanceSuperhero July 17, 2016 on 9:14 pm

    This is a valuable resource for people who don’t have 401k access, Kate. Our CPA recommended the Solo 401k as a method to invest the earnings from my wife’s small business. It is something we plan to look into in 2017.

  • ZJ Thorne July 29, 2016 on 10:56 pm

    No employer-sponsored plans, but once my own LLC starts paying me, I’ll look into the SEP and the Solo 401K. By that point, I’ll need to get a CPA as this stuff will just be getting too complicated for me to handle properly on my own.

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  • TJ September 4, 2016 on 9:11 pm

    I was never allowed to put much into my 401(k). I just maxed out the IRA and invested the rest in a taxable account. It’s unfortunate that there isn’t more awareness of the options.

    • Kate Dore TJ September 5, 2016 on 10:13 am

      Was there a restriction at your company, TJ? I agree a lot more education about retirement savings options is needed.

      • TJ Kate Dore November 6, 2016 on 12:38 am

        The restriction being I work for a family member and they didn’t want to have a safe harbor plan to overrule that because such a plan requires mandatory employer contributions with no vesting. We don’t even have a match right now.

        In retrospect, it’s kind of nice because if everything was tied up in retirement accounts, I wouldn’t have as much wiggle room to feel comfortable taking a year off from work to go exploring…. 🙂

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