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What to Do if You Don’t Have a 401(k) Plan

You have plenty of other options to save for retirement

401k written in the sand with an ocean wave washing it away
iStock / Getty Images

You’ve probably read lots of advice about how to handle your 401(k) account. But nearly half of all private-sector workers don’t have access to a workplace retirement plan, according to AARP research. If you’re one of those people without access to a 401(k) plan, here’s how to build your own retirement nest egg.

The spousal strategy

If your spouse has a 401(k) plan but you don’t, consider socking away as much as you can afford as a family in your spouse’s plan. Even if you use only your spouse’s plan, you can still save a lot of money for retirement. For 2022, workers who are younger than 50 can contribute a maximum of $20,500 in a 401(k). Those 50 and older can put away another $6,500 as a catch-up contribution for a total contribution of $27,000.

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Contributions to a traditional 401(k) account come out of your paycheck pretax, which lowers your taxable income. The money inside a traditional 401(k) plan will be invested and grow tax-free. You won’t owe taxes until you start taking withdrawals.

Some employers also offer what’s called a Roth 401(k). With a Roth account, contributions are made with after-tax money. So while your contributions won’t lower your taxable income now, you won’t pay taxes on future withdrawals.

The IRA strategy

If neither of you has a 401(k) plan, your next best bet may be an individual retirement account. In 2022, individuals can put $6,000 into an IRA; those 50 and older can invest an extra $1,000 catch-up contribution for a total of $7,000. Although you can’t contribute as much to an IRA as to a 401(k), an IRA can be a powerful retirement savings tool. At current contribution limits, a person who starts contributing at age 50 can sock away $105,000 in an IRA by age 65, excluding any investment returns on the principal; a couple could save $210,000.

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Both traditional IRAs and Roth IRAs are available, but a Roth IRA has several advantages, especially if you don’t value that tax break this year. You can’t deduct your contributions on your tax return, but if you have your Roth account for five years and you are over 59½, your withdrawals are tax-free. You can also withdraw your contributions tax-free and penalty-free at any time. There are no required minimum distributions (RMDs) for Roth IRAs when you reach age 72, as there are for traditional IRAs.

Your Roth contributions are limited by your income. Those who file as a single taxpayer must have modified adjusted gross income (MAGI) of less than $129,000 to make a full contribution. (MAGI is your adjusted gross income on your 1040 or 1040-SR tax form, minus certain deductions, such as student loan interest.) Single filers with MAGI between $129,000 and $144,000 can make a partial contribution. For those who file jointly, the limit for a full contribution is $204,000. Those with MAGI between $204,000 and $214,000 may make a partial contribution.

You may be able to deduct contributions to a traditional IRA, but you’ll have to pay taxes on withdrawals at retirement. You’ll also have to start taking RMDs when you reach age 72. If you and your spouse don’t have a retirement plan at work, you can deduct your full contribution to a traditional IRA no matter your income. If you or your spouse (or both) do have a retirement plan at work, the deduction starts to phase out as your income rises. (See the IRA deduction limits for 2022.)

Self-employed

If you are self-employed (or have self-employment income), you might consider a Simplified Employee Pension Plan, or SEP-IRA. Contributions reduce your taxable income, which reduces your income tax bill. You can contribute up to 25 percent of your self-employment income to a maximum of $61,000 for 2022. ​

​SEP-IRAs are relatively easy to set up, although they become more complicated if you have employees. As with traditional IRAs, you’ll owe taxes on withdrawals and, if you take withdrawals before age 59½, you may owe a 10 percent tax penalty. You must start taking RMDs at age 72.​

State Work & Save Programs

AARP has long pushed for state legislation to enact Work & Save retirement programs for people who work for companies that don’t offer 401(k) plans. The most common plan is a state-facilitated, privately administered Roth IRA. These plans feature a payroll deduction that goes automatically from your paycheck to the IRA, making it easier for workers to save.

People who have automatic payroll deduction at work are 15 times more likely to save for retirement than if they don’t, says Katie Selenski, executive director of CalSavers, California’s state-run plan.

As of the end of June, six states — California, Connecticut, Illinois, Massachusetts, Oregon and Washington — have these automatic Work & Save programs up and running. Maryland’s program is scheduled to launch statewide in September, and six other states have passed legislation authorizing similar programs.

Open a nonretirement account

Nothing says you need a retirement account to save for retirement. Banks and brokerages will be happy to hold your money in a regular account until you need it when you retire. Discount brokerages such as Charles Schwab, Fidelity and TD Ameritrade offer a wide array of investments, from mutual funds to individual stocks and bonds.

While it’s true you’ll give up the tax perks offered by retirement accounts, unlike IRAs and 401(k)s, there’s no tax penalty for taking early withdrawals from a nonretirement account. You also get some tax advantages from saving in a nonretirement account: Unlike investments held in 401(k)s or IRAs, you can take a tax deduction for investment losses. And if you sell your shares after a year at a profit, those profits will be taxed at lower long-term capital gains rates — a maximum of 20 percent — rather than your ordinary tax rate. You’ll also pay taxes annually on the interest and dividends you earn in a nonretirement account.

If you go this route, New York certified financial planner Kevin Brady recommends investing in a broad-based, low-cost index fund, such as the largest 1,000 U.S-traded stocks. “This provides flexibility if funds are needed later and tax efficiency,” he says. These passively managed funds tend to have low annual fees.

Many actively managed stock mutual funds make annual (and often unwanted) capital gains distributions at the end of the year, leaving shareholders with an extra tax liability. Index funds, however, rarely distribute capital gains, making them more tax efficient.

Stock mutual funds may also distribute the income they receive as dividends. Qualified dividends, however, are taxed at a maximum 20 percent.

If you want bonds in your nonretirement account, consider municipal bond funds: Their interest is free from federal income taxes. If the fund limits its muni investments to your state, interest may be free from state taxes as well.

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