How To Save For Retirement Without A 401(k)
The combination of Social Security and a 401(k) is the cornerstone of most American retirement plans. However, about a third of Americans don’t have access to a 401(k) or other retirement plan through their employer.
If you are one of these people, you need to take retirement savings into your own hands. There are many ways to save for retirement without a 401(k), and each has its own blend of benefits and drawbacks. Here are five useful alternatives to investing with a 401(k).
Save for Retirement with an IRA
Individual Retirement Arrangements – better known as IRAs – are a versatile option for retirement savings. These plans allow you to contribute up to $7,000 in 2024 if you are under age 50 and $8,000 if you are age 50 or older. Inside the IRA, you have many investment options like mutual funds, ETFs, stocks, and bonds to grow your savings.
IRAs come in two varieties – Traditional and Roth. Each type of IRA offers different tax benefits and is subject to different eligibility rules.
Traditional IRAs
Traditional IRAs provide an immediate tax break if you qualify to deduct your contributions. If neither you nor your spouse are covered by a retirement plan at work, you can deduct your entire contribution no matter how much you earn. On the other hand, if either you or your spouse is covered by an employer sponsored plan, your income must be below the applicable threshold to deduct your contribution.
While Traditional IRAs provide upfront tax savings, you have to pay taxes on withdrawals – including the amount your investments earned. Typically, these taxable withdrawals occur in retirement when taxes should be lower, but one benefit of an IRA is that you can withdraw the money at any time for any reason – even before retirement if you are willing to pay a penalty.
Roth IRAs
Unlike Traditional IRAs, Roth IRAs do not provide an immediate tax benefit. Instead, you contribute after-tax money to the account and then enjoy tax-free withdrawals in retirement if you meet the requirements for a qualified withdrawal.
The eligibility requirements for Roth IRAs also differ from their Traditional counterparts. To contribute to a Roth IRA in 2024, your income must be below $146,000 if you are single or head of household or $230,000 if you are married filing jointly. If your income is above this limit and you want to contribute to a Roth IRA, speak to an experienced financial advisor about your options.
Supplement Your Retirement Income with An Annuity
Annuities are another type of account that you can use to save for retirement or supplement other savings accounts. These types of accounts are unique because they provide a guaranteed monthly benefit in retirement – similar to a pension.
There are many types of annuities that offer varying contribution options, investment growth options, and levels of income. There are also tax differences between types of annuities.
Qualified annuities are purchased with pre-tax funds – typically through a 401(k) or IRA – and retain the favorable tax treatment of the account. Nonqualified annuities, on the other hand, are purchased with after-tax dollars. While they don’t provide an immediate tax break, nonqualified annuities defer tax on the earnings in the account until withdrawal. This helps the funds in the account grow more quickly due to compounding returns.
Use An HSA To Save For Retirement Health Care Expenses
While not a traditional retirement account, a Health Savings Account [HSA] can also be used to lower your tax burden and save for health-related expenses in retirement. HSAs are available if you have a High Deductible Health Plan, and they are one of the only types of “triple tax-advantaged” accounts. This means you don’t owe tax on the money you contribute, the dividends you earn each year, or the money you withdraw from the plan for qualifying health expenses.
You may be wondering: if HSAs are for health expenses, why are they on this list of retirement savings vehicles? There are two reasons. First, you can use the funds in an HSA to pay for Medicare premiums during retirement, which is a significant benefit for retirees. Second, if you don’t use the funds in an HSA for health care, you can withdraw them after age 65 for other purposes. However, you will owe tax on the amount you withdraw.
Invest With a Brokerage Account
If you’ve maximized your tax-advantaged retirement savings options, you can still invest in a brokerage account. These accounts generally allow you to purchase the largest variety of investments including mutual funds, ETFs, stocks, commodities, derivatives, and bonds to grow your savings.
The benefit of a brokerage account is that you can invest in securities that could help your portfolio grow more quickly than a savings account. On the other hand, the downside of a brokerage account is that you generally owe income tax on dividends each year and capital gains tax when you sell a security.
Retirement Savings Options for Self Employed Individuals
If you are self-employed, you have many additional options to save for retirement. Some of the most common are SEP IRAs, SIMPLE IRAs, and Solo 401(k) plans.
Most retirement plans for self-employed people are tax-advantaged and allow you to choose between Traditional and Roth contributions. Additionally, most allow you to contribute as an individual and make contributions to your account on behalf of the business – saving you on both personal and business taxes.
The various types of self-employment retirement accounts offer different contribution limits, investment options, and tax advantages. An experienced financial advisor can help you determine which type of account meets your needs and offers the most favorable tax consequences for your situation.
Brookstone Wealth Management Can Help You Save For Retirement
At Brookstone Wealth Management, our team of experienced financial advisors can help you weigh the benefits of various types of retirement plans and choose the right one for your situation. In fact, our comprehensive wealth management plan, Financial Fingerprint™, helps with all of your important retirement planning decisions – from starting to save through ensuring your income lasts a lifetime.
With Financial Fingerprint™ and a partnership with an experienced advisor, you can compare contribution limits, tax benefits, and investment options to find the right plan for your situation. Best of all, our focus on coaching, teaching, and mentoring our clients means you have support throughout your retirement saving journey.
To learn more and get started, contact us today.
