Although 401(k) plans are almost synonymous with saving for retirement, they are far from your only option. This is good news for people who don’t have access to traditional employer-sponsored plans (including those who are self-employed) as well as for anyone who wants to save more for retirement that a 401(k) allows.
Let’s take a look at some options to save for retirement without a 401(k).
1. IRAs
Individual retirement accounts (IRAs) are one of the most common options to save for retirement outside of 401(k)s. They are tax advantaged and contain a combination of investments that a financial advisor chooses on your behalf. IRAs come in two main forms: traditional and Roth. The main difference between them is when you pay taxes on the funds.
IRAs have quite a low annual contribution limit. In 2024, it’s $7,000 for those under age 50 and $8,000 for those aged 50 and above. In addition, there’s an income limited based on your modified adjusted gross income (MAGI) — the limit is higher for Roth IRAs than for traditional IRAs. This means you’ll likely want another investment in addition to an IRA if you’re trying to save a comfortable amount for retirement.
Traditional IRAs
Traditional IRAs are available from banks and other financial institutions. The funds you contribute are income tax deductible on your tax return. This provides you with a tax break until you withdraw the money during your retirement, at which point the funds are taxable as ordinary income. You’ll be able to start withdrawing without penalties at age 59.5, and you must make required minimum distributions (RMDs) starting at age 73.
Roth IRAs
You can take out a Roth IRA through a bank, credit union, or brokerage. It works in the opposite way to a traditional IRA: you pay tax on funds as you add money to your account and don’t pay taxes on qualified withdrawals. For a withdrawal to be qualified, it must be in an account established for least five years and you must be aged 59.5 or above. Consider a Roth IRA over a traditional IRA if you expect to be in a higher tax bracket during your retirement than before retiring.
Specific Types of IRAs
Some specific types of IRAs include:
- Self-directed IRAs (SDIRAs) — Also called a self-managed IRA, self-directed brokerage, or self-directed investing, a SDIRA allows you to choose your own investments. It also gives you access to a wider array of assets, including real estate, precious metals, and cryptocurrency.
- Simplified employee pension (SEP) IRAs — Only employers and self-employed individuals can set up SEP IRAs. Contributions are based on the cash flow of the business and must be no more than 25% of employee compensation or $69,000 (in 2024) — whichever is less.
- Rollover IRAs — If you had a workplace savings plan you are no longer able to contribute to, you may like to move the funds to a rollover IRA. This is possible with 401(k), 403(b), and 457 plans. You can roll over all or just some of the funds.
2. Annuities
With an annuity, you pay either a lump sum or a series of premiums to an insurance company. In return, the insurer pays you a cash benefit. Such investments are often expensive because contracts often have high fees and you need to pay taxes on the funds upon withdrawal. However, the returns tend to be predictable, which means you’ll have a regular income during your retirement.
There are three main types of annuities:
- Fixed annuities — These offer a guaranteed interest rate.
- Indexed annuities — Interest is linked to an equity index.
- Variable annuities — Interest is based on the returns of the underlying investments.
3. Securities
The high potential returns of securities may make them a good option for saving for retirement, although the flip side of this is the high risk. There is also no tax advantage — you’ll need to pay capital gains taxes on earnings. However, the lack of an annual contribution limit gives you the freedom to invest as much as you wish.
Securities to consider include:
- Stocks
- Bonds
- Mutual funds
- Exchange-traded funds (ETFs)
4. Real Estate
There are a few ways to invest in real estate for retirement, including through purchasing property yourself and by investing in the real estate market.
Rental Properties
Buying real estate to turn into a rental property provides you with a source of passive income with tax advantages. Plus, there’s a good chance the property will appreciate over time, allowing you to sell it for a profit and gain access to a large amount of money.
Although renting property is called passive income, it does require quite a bit of work, including staging and listing the property, choosing tenants, collecting rent payments, and perhaps dealing with evictions. You’ll also need to familiarize yourself with state and local regulations to ensure you stay on the right side of the law.
Real Estate Investments
A more hands-off approach is to use real estate investments. Some options include real estate ETFs, the most common of which are real estate investment trusts (REITs). You can invest through a mutual fund, IRA, or brokerage account.
5. Precious Metals
You may like to diversify your investment portfolio beyond securities with precious metals. These tend to retain their value even in the face of economic downturns, although there is always the potential for price fluctuations with changes to things like mining, production rates, and demand. Like real estate, precious metals are available through ETFs as well as in their physical form.
6. HSAs
Health savings accounts (HSAs) allow you to save for health expenses now and retirement later. Bear in mind, though, this is another option with maximum contributions — in 2024, the maximum was $4,150 for individual coverage and $8,300 for family coverage.
HSAs have a triple tax advantage: contributions are tax deductible, earnings are not subject to income tax, and withdrawals are tax free when they’re for medical expenses. After you turn 65, you can withdraw funds to cover costs other than medical expenses without facing a penalty, although you will pay income tax on the amount you withdraw.
7. Small Businesses
If you’re not ready to stop working entirely when you retire, an option to earn income could be to start your own business. You’ll have the chance to use the skills you learned throughout your employment to become an entrepreneur. Another option is to invest in a small business, such as a startup or franchise. You can become a silent partner if you want to invest without having an impact on daily operations.
In either scenario, there’s no limit to how much you can earn, meaning there’s a higher potential return on investment than for most other options. Of course, this also means the risk is higher — and there’s no guarantee you’ll make any returns.
8. Savings Accounts
A final option is to use regular savings accounts to put away money for retirement. Although this won’t provide you with any tax benefits, it’s a good option to have in addition to things like securities due to the instant access combined with lower volatility. This allows your savings accounts to double up as an emergency fund.
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