How to Save for Retirement Without a 401(k)

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The 401(k) is one of the best retirement tools out there. If your employer offers matching contributions, it's unbeatable in terms of how much you can save. Free money is the best kind there is.

However, not everyone is fortunate enough to have access to a 401(k). In fact, 30% of baby boomers and 35% of gen X-ers who work for private-sector companies don't have a 401(k), according to a 2017 Pew survey. The numbers are even more discouraging for younger workers, with 41% of millennials lacking access to an employer-sponsored retirement plan.

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Does that mean you're out of luck when it comes to saving for retirement? No, but it does mean you'll have to work a little harder to build your nest egg. The good news is that you do have other options, so there's no excuse not to save for retirement.

The best alternative to a 401(k)

If you don't have access to a 401(k), the next best option is either a traditional IRA or a Roth IRA. These two retirement plans are similar in many ways, but the biggest difference is how they're taxed.

With a traditional IRA, contributions are tax-deductible up front. Your money then grows tax-deferred until you start taking distributions during retirement, at which point you'll pay income tax on the amount you withdraw. Roth IRAs work the opposite way: You're taxed on your contributions when you make them, but you don't owe taxes when you withdraw your funds.

Another key difference is the amount you're allowed to contribute each year (and whether you're eligible to contribute at all). For 2019, those who have traditional IRAs are allowed to contribute a maximum of $6,000 per year (or $7,000 per year if you're 50 or older.)

With Roth IRAs, though, the yearly limit depends on your income. If you're earning more than the yearly income limit ($137,000 per year for single filers and a combined income of $203,000 per year for those who are married and filing jointly,) you're not eligible to contribute to a Roth IRA. (However, even if you're ineligible, it's still possible to utilize a Roth IRA through "backdoor contributions," which is essentially when you contribute to a traditional IRA and then convert it to a Roth IRA.)

For single filers earning between $122,000 and $137,000 per year, as well as those who are married and filing jointly earning between $193,000 and $203,000 per year, it's possible to contribute to a Roth IRA, but the exact amount will depend on how high your earnings are (the more you earn, the less you can contribute). Those earning less than $122,000 or $193,000 per year, though, can contribute the full $6,000 per year.

You can contribute to both a Roth IRA and a traditional IRA, but your combined contributions can't exceed the $6,000 per year (or $7,000 per year) limit. For power savers, that can pose a predicament.

If you're serious about saving for retirement, you'll likely need to save more than $6,000 per year. Many financial experts recommend setting aside 15% of your salary each year for retirement, so if you're earning more than $40,000 per year, 15% of your salary is more than $6,000.

What would happen, though, if you max out your IRA every year? Surely that would be enough to get through retirement, right? The answer is that it depends. If you're 25 years old and you plan on contributing $6,000 every year for 40 years while earning a 7% annual rate of return on your investments, you'd end up with about $1.2 million by the time you turn 65.

However, because most of us don't have a lifetime to save, it can be harder to see those types of results in a more limited timeframe. Say you're 40 years old and you're contributing $6,000 per year until you turn 50, at which point you start contributing $7,000 per year for another 15 years. Still assuming a 7% annual rate of return, by the time you turn 65, you'd have just $405,000 saved. While that's still an impressive number, it may or may not be enough to last you through retirement.

What to do if you max out your IRA

If you're able to save more than $6,000 per year, you should, but you'll need to get creative about where you stow your money.

One option is to take advantage of a health savings account (HSA). You're eligible for one if you're enrolled in a high-deductible healthcare plan (meaning you have a deductible of more than $1,350 if you're single or $2,700 for a family plan.) In 2019, you can contribute a maximum of $3,500 per year (for those who are single), or $7,000 per year (for families) to your HSA.

With an HSA, you can contribute pre-tax dollars, let that money grow over time, and then withdraw it tax-free as long as it goes toward qualifying medical expenses (which can include everything from prescriptions to dental work to eyeglasses.) The average 65-year-old couple retiring today can expect to spend at least $280,000 on healthcare alone during retirement, according to research from Fidelity Investments, so an HSA can help prepare for those expenses.

If you're self-employed, you also have the option of opening a SEP IRA or a SIMPLE IRA. A SEP IRA is similar to a traditional IRA in that contributions are tax-deductible, and you won't pay taxes on that money until you withdraw it. For 2019, you can contribute up to 25% of your annual net earnings up to $56,000.

SIMPLE IRAs are similar, but they have yearly contribution limits of $12,500 (plus an additional $3,000 per year if you're 50 or older). The biggest difference between SEP IRAs and SIMPLE IRAs is that with SEP IRAs, all contributions are made by the employer, not the employee. With SIMPLE IRAs, though, employees contribute to their fund and the employer can match those contributions. If you're a business owner and the retirement plan is for yourself, you'd be playing the role of both employer and employee.

If your employer isn't helping you save for retirement, you may feel at a loss for how to fund your future. But you have plenty of options. Not having a 401(k) doesn't give you a free pass to not save for retirement. Utilizing the many other retirement savings vehicles detailed here will help you live comfortably in retirement.

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