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No 401(k)? Consider an IRA

Save for retirement and achieve self-sufficiency when it comes time for you to stop working

Are you working for an employer who doesn’t offer a 401(k)-type retirement savings plan? This can be a real worry for millions of working Americans, who fear they can’t effectively save for retirement without a 401(k).

The good news is you still can save for retirement and achieve self-sufficiency when it comes time for you to stop working. It’s easier than you might think. Follow these steps for getting your retirement savings started today.

1. Start to save so you can start saving

This may sound a little odd, but it’ll make sense shortly. When you decide to save for retirement, an individual retirement account, or IRA, is a good option. You’ll need a minimum deposit to get started. Some banks or financial institutions will let you open an IRA for as little as $100 if you set up regular contributions. Most institutions set the minimum deposit at $1,000.

You can start putting money aside today to get your deposit together. Can you save $25 a week? If it sounds like a lot, think of ways to cut your expenses. You could pack lunch instead of buying it, or eat at home more often than eating out. If you stop to get coffee in the morning, try making your own instead.

2. Choose the right IRA for you

An IRA is a great way to save for retirement because it has tax benefits that regular savings accounts don’t have. You can open an IRA and contribute up to $5,500 a year. If you are age 50 or over, you can contribute an extra $1,000 a year.

You have a choice between a traditional IRA and a Roth IRA. The difference is in how your money gets taxed. Your contributions to a traditional IRA aren’t taxed going in but get taxed when you take the money out in retirement. The money your money makes in the IRA (the “gains”) is also taxed when you take the money out.

With a Roth IRA, your contributions are taxable, but you don’t pay any taxes on your withdrawals or gains in retirement. Only individuals who make $181,000 or less are eligible to participate in a Roth IRA. You can contribute up to $5,500 a year and an extra $1,000 if you are age 50 or over. Some experts say the Roth IRA is a better option than a traditional IRA, but it is important to consider what is best for your financial situation.

3. Open an IRA

The hardest part is deciding where to open your IRA. You could do this through a traditional bank, but your investment options may be very limited. If you belong to a credit union, you may find you can open an IRA with a low initial contribution. Plus, you may have a wider range of investment options than with a bank. You could also consider big investment firms, like Vanguard, Fidelity, T. Rowe Price, Schwab or others.

It’s important to know up front what fees you will be charged. Some institutions charge an annual maintenance fee or a fee for paper statements. You may be exempt from those fees if you manage your account online, so be sure to ask.

4. Choose your investments

When you save through an IRA, you have choices about how to put your money to work for you. Depending on where you open it, you can pick from investments that earn interest, like certificates of deposit (CDs) or money market funds. When you have a long time (10 or more years) before you need the money, it may be better to choose investments that can potentially earn more money for you.

For example, you could invest in a stock mutual fund which has investments in different companies. When the companies do well, your gains grow. There’s a risk that they won’t do well, too, which could cause investment losses. Over a long period, though, mutual funds are more likely to provide gains and do better for you than interest-bearing investments like CDs.

To learn more about investing, see AARP’s tip sheet Investing for the Long Haul.  In addition, consult with a financial planner if you are unsure.

5. Set up automatic contributions

The best way to save for a long-term goal like retirement is to make it automatic. When you open an IRA, you can give the institution your bank information (routing number and account number, both found on your checks). Then identify how much you would like to contribute and how often. If you get a raise down the road, give your retirement savings a raise, too, by increasing your contribution.

You can do this!

The hardest part about saving is getting started. Once you start, you’ll find that you won’t even miss the money you’re putting away. And remember, the money is going toward a good cause — your future financial security.

To learn more about IRAs, read AARP’s tip sheet Saving for Retirement Through IRAs.