If you don’t have a 401(k) where you work, saving for retirement can seem practically impossible. Workers who have an employer-sponsored 401(k) can kick-in $17,500 (for 2014) every year into the plan. Plus, if they have a really generous employer, a company match can bring total annual 401(k) contributions up to a whopping $52,000! Even more with catch-up contributions for 50+ workers.
That’s a pretty strong retirement savings plan. But if your boss doesn’t offer a 401(k), there are some attractive alternatives. If you are self-employed, or work for a small company, here are four employee retirement plans worth considering.
Payroll deduction IRA
This is a simple solution that makes your IRA contributions easy and automatic. Rather than waiting until the end of the year — or tax time – to make your IRA contribution, your employer can set up an automatic payroll deduction. Just like a 401(k), that means you never see the money fall into your checking account, tempting you to spend it. It sweeps, clean and unseen, right into your IRA.
Your employer won’t have to file any paperwork with the IRS and you determine how much comes out of your check each payday. Of course, the annual maximum IRA contribution (all contribution limits listed in this article are for 2014) is $5,500 — unless you are 50 or over – then, you can pitch in a catch-up contribution of another $1,000.
Even better, is the SIMPLE IRA. Why is it better? Because you can save $12,000 a year, with catch-up contributions for workers 50+ adding another $2,500. And with this plan, your employer can make contributions, too – matching up to 3% of your deferrals or making 2% contributions of each eligible employee’s compensation, even if they don’t put in a dime. That really helps build a bigger nest egg.
Your boss will also like the fact that this retirement plan has minimal paperwork and there are no annual filing requirements for the employer. The financial provider will take care of that.
SIMPLE IRA 401(K)
This is a SIMPLE IRA plan with just a couple of twists: participants can take loans and hardship withdrawals from the plan, just like a 401(k) – but employers have to file an annual Form 5500. Other than that, pretty much everything else remains the same: the employee deferral and employer match limits are unchanged.
With a big-hearted employer, this plan can be a supercharged retirement wealth builder. But this is a “one-way” IRA. Only the employer contributes, and they don’t have to put in anything at all on your behalf from one year to the next.
Your employer may contribute up to 25% of your compensation or $52,000, whichever is less, to your SEP IRA. The company can max out the contribution one year, and then make no contribution the next. There are no contribution mandates. The employer’s deposit to your SEP IRA is not a match to your contribution (because you, as an employee, can’t put money into the SEP) and it is totally discretionary. But every employee has to be treated the same — for example receiving a contribution based on the same percentage of pay — if the employer decides to make any contribution.
SEP IRAs are a favorite for the self-employed – it allows them to contribute to their own plan as an employer/employee and enjoy a higher savings rate than other retirement plans offer, though special contribution limits apply to the self-employed. Paperwork is minimal, and there are no annual reports typically filed by the employer.
The flexibility of these alternative retirement plans can fit into the compensation strategies of many small companies – or self-employed entrepreneurs.
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