Retirement planning is an essential financial goal, but not everyone has a company 401(k). In fact, according to the U.S. Bureau of Labor Statistics, one-third of Americans don’t have access to employer-sponsored retirement plans like a 401(k), which could compromise their plans to save for retirement. For those who are self-employed, lack an employer-sponsored plan, or just looking for other ways to save, there are options besides a 401(k).
401(k) alternatives for employees without sponsored plans
A 401(k) is one way of saving for retirement, but it’s not the only one. For those who don’t have a 401(k) through their employer, there are alternatives.
Individual retirement accounts, or IRAs, are tax-deferred accounts that aren’t tied to a company or work relationship. Anyone with income can open an IRA. For those who also have a 401(k) through their workplace, an IRA allows them to save in addition to their employer-sponsored plan.
It’s important to note that not everyone can claim an IRA tax deduction. For those with a work-sponsored retirement account and an IRA, deductions are based on marital status and income. For instance, in 2022, single filers earning $68,000 or less can claim the full deduction of their contribution limit. Those married filing jointly and earning $129,000 or more cannot claim a deduction that year. While it’s possible and legal to have multiple IRAs, the contribution limit applies to all IRAs, not individual accounts.
There are a few different IRAs to choose from, but two of the most popular are traditional IRAs and Roth IRAs.
Traditional IRAs let participants contribute up to $6,000 (or $7,000, if they’re eligible to make catch-up contributions) pre-tax each year. That means that the individual can deduct their contributions from their taxes in the year they make them—and instead pay taxes on distributions in retirement.
Note that a spouse’s participation in a workplace retirement plan can affect one’s eligibility for a tax deduction on their IRA contributions.
Another thing to note is that many types of IRAs, including traditional IRAs, are subject to required minimum distributions (RMDs), the annual amount that must be withdrawn from retirement plans starting when the account holder turns 72.
Roth IRAs allow participants to contribute money after they’ve paid tax on it, not before. That is, they pay income tax on contributions when they’re made—but withdrawals in retirement are tax-free.
As of 2022, Roth IRAs have the same maximum contribution limits as traditional IRAs. An individual can contribute $6,000 per year, and those 50 and older can make an additional $1,000 in catch-up contributions.
Roth IRAs limit who can contribute based on modified adjusted gross income (MAGI). For instance, earners married and filing jointly with a MAGI of less than $204,000 can contribute up to the full amount. Earners with the same filing status who earn $204,000 to $214,000 can contribute a reduced amount. Those who make more than $214,000 can’t contribute at all. The same rule applies to single filers who earn more than $144,000.
Roth IRAs are not subject to required minimum distributions. Inherited Roth IRAs are.
FYI: Try Titan’s free Roth IRA Calculator to project how much your Roth IRA will give you in retirement.
Traditional IRAs and Roth IRAs: key differences
The most notable differences between traditional and Roth IRAs are tax treatment and RMDs.
Taxable brokerage accounts
Another alternative to investing in a 401(k) is opening a taxable brokerage account, an investment account where individuals can buy different types of securities, like stocks, bonds, mutual funds, exchange-traded funds (ETFs), and more. In general, there are three types:
- Full-service broker: With a full-service broker, account holders share their investment goals and how much they can contribute on a monthly basis. The broker helps manage the portfolio and these accounts tend to have higher fees, both for transactions and managing the account.
- Online brokerage: These are self-directed investment accounts where the account holder makes all the investment moves, handpicking stocks and other securities and choosing when to invest. There are few fees and many don’t charge commissions on trades.
- Robo-advisor: Using an algorithm, a robo-advisor automates investments for the account holder by putting money into a diversified portfolio based on their risk tolerance and time horizon. While there are some custodial and management fees, they tend to be less than full-service brokers. These products often charge small fees based on the size of the portfolio. Account holders can override their robo-advisor’s investment decisions.
Taxable brokerage accounts vs. retirement accounts
Taxable brokerage accounts can be used to save for retirement, though they’re not specifically made for long-term growth. Here are some other differences:
- IRAs offer tax-free deductions or contributions; taxable brokerage accounts do not and capital gains will be classified as taxable income.
- Taxable brokerage accounts can be withdrawn whenever the account holder wants. There are early withdrawal penalties for retirement-specific plans.
- Taxable brokerage accounts may have fewer fees compared to retirement accounts.
Additional 401(k) alternatives for self-employed individuals
There are a few different retirement account options for self-employed individuals. Each one is tailored to a person’s individual business since not all business owners have employees.
A solo 401(k), or self-employed 401(k), is a retirement plan for a sole proprietor who doesn’t have other full-time employees (unless the other employee is a spouse, who may qualify for the plan). The same rules for a standard workplace 401(k) apply to a solo 401(k).
Self-employed individuals can make two types of contributions to their solo 401(k):
- Employee maximum contribution. For 2022, individuals can contribute up to $20,500 or 100% of compensation, whichever is less. Individuals 50 and over may make an additional $6,500 catch-up contribution.
- Employer maximum contribution. For 2022, employers can contribute up to 25% of their compensation from the business or $61,000, whichever is less.
The total solo 401(k) contribution limits are $61,000 in 2022.
Traditional vs. Roth 401(k)
Assuming that they meet eligibility requirements, business owners can choose between a traditional and Roth for their solo 401(k):
- Traditional 401(k). These tax qualified distributions, while contributions are tax-free.
- Roth 401(k). With these, contributions are taxed but distributions aren’t. Unlike with Roth IRAs, eligibility is not subject to income limits.
For workers who don’t qualify for a Solo 401(k) or need more options, there are a few IRAs to consider.
- SEP IRA. A Simplified Employee Pension Plan, or SEP, is a type of tax-advantaged retirement plan available to self-employed people or small business owners and their employees. Employers mainly contribute, unless the plan also allows employees to contribute as well. Employers must contribute to the plan for all eligible employees. Contributions may be up to 25% of each employee’s pay or $61,000 in 2022. The employee is 100% vested in all funds from day one.
- SIMPLE IRA. Savings Incentive Match Plan for Employees, or SIMPLE, is an IRA that lets both employers and employees contribute to the plan. Employers must contribute a matching contribution of up to 3% of compensation or a 2% non-elective contribution. For non-elective contributions, employers make contributions regardless of whether the employee does. Employees are 100% vested in all funds and may elect to contribute.
The bottom line
For workers without a 401(k), there are retirement plans available, whether it’s a traditional IRA, a taxable brokerage account, or a combination. Income, marital status, and work-sponsored opportunities may factor into the type of retirement accounts each person can have.