When you want to save for retirement but find out your employer doesn’t offer a 401(k), it can be disappointing. The good news is that there are 401(k) alternatives that you can put your retirement money into and earn considerable interest.
Opt for a Solo 401(K)
Other than an employer 401(k), probably the best way to save for retirement would be to create an individual 401(k), also called a participant 401(k). The only requirement is that you must be a business owner with no employees. More good news is that your spouse does not count as an employee.
MySolo401k mentions that the money you put into an individual 401(k) account must be earned by yourself. It can come from a limited liability company, S corporation, C corporation, sole proprietorship, or limited partnership, but it must come from the “earned income” you generate.
You can make contributions to an individual 401(k) even if you have a full-time job. Money earned from a side job or part-time self-employment (if you work alone) can be deposited into this type of account. You can also have a 401(k) through your full-time employer and a 401(k) alone, but you can’t exceed the maximum contributions allowed for them.
The 2023 contribution limits in a single 401(k) are $22,500, or $30,000 if you’re age 50 or older. RamseySolutions It says you can contribute up to 25 percent of your income, but it can’t exceed $66,000 annually. A single 401(k) is a great option because it can put much more money into the account than is possible in an IRA.
When choosing your self-employment 401(k), you can get either a traditional 401(k) or a Roth 401(k). A traditional 401(k) takes contributions on a pre-tax basis, before taxes are paid on the money, but will pay taxes on withdrawals. It may be the best option if you think your income will be less in retirement. It will also allow you to have a larger paycheck each month.
A Roth 401(k) takes contributions on an after-tax basis, which means you pay taxes on the money before you contribute and withdrawals are tax-free. This method lowers your monthly income now, but will give you larger withdrawals in retirement.
An Individual Retirement Account (IRA)
Another alternative to a 401(k) is the IRA. You can contribute to a traditional IRA with pre-tax dollars. It allows you to deduct the amount contributed from your income. You will pay taxes when you withdraw the money from the account.
bank fee says that one of the benefits of an IRA is that it gives you “an almost unlimited number of investments” to choose from. You will need to decide how to invest the money, or you can choose to have someone do it for you.
A Roth IRA
The Roth IRA is a step above a traditional IRA because it gives you some nice extra benefits. You’ll pay taxes on all the money you contribute up front, but you’ll pay nothing when you withdraw the money after age 59½. Investopedia it says you must have had the account for five years before you did this.
Another nice benefit is that you can withdraw money from the account without penalties, which you can’t with a traditional IRA. BankRate says you can take out all of the contribution money without penalty, but you can’t take out the earned money in the account.
One more benefit is that you are not required to take required minimum distributions (RMDs) when you turn 72. You can also continue to make contributions after you reach that age.
You can contribute up to $6,500 in 2023. If you’re over age 50, you can also make additional contributions of $1,000 per year, for a total of $7,500.
A Roth IRA has some eligibility requirements based on your income. If you’re married filing jointly, you can contribute to a Roth IRA if your modified adjusted gross income is less than $218,000 in 2023. Singles can contribute if they earn less than $138,000.
If you are married and have a spouse who does not work, you can open a spousal IRA. RanseySolutions says that this type of IRA allows you to save twice as much money, which is beneficial because IRAs offer much smaller limits than 401ks.
Simplified Employee Pension IRA (SEP IRA)
The SEP IRA is a retirement savings plan that allows small business owners to help contribute to their employees’ retirement. The self-employed can also take advantage of this plan.
The main advantage is that it gives you a much higher contribution limit than any other IRA account. Like an individual 401(k), you can contribute up to 25 percent of your income, or a maximum of $66,000.
One important thing to know about this type of account is that you must give your employees the same percentage of your salary for their contributions. If you contribute 10 percent of your salary, you must also contribute 10 percent of your salary to your funds.
A taxable brokerage account
Scam Mention another option. You can also make contributions to a taxable brokerage account. If you get dividends, you will have to pay taxes each year. If you invest in stocks that don’t pay dividends, you won’t pay any tax until you sell the stock at a profit.
These are just a few ways to save for retirement, without an employer’s 401(k). You can use one or more of the above accounts to build a secure and comfortable retirement. It is necessary to start as soon as possible so that your money has time to earn more.
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