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

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.​

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.