Retirement may feel a pretty long way off, but when it comes to saving for the future, slow and steady wins the race. Employer-sponsored retirement plans called 401(k)s can be a great way to build your nest egg. They let you automatically funnel a portion of your pre-tax earnings into an investment account where it can grow until you’re ready to retire. Many employers will even match a portion of your contributions. In a nutshell, a 401(k) can supercharge your savings — but how can you save for retirement without one?
The Pension Rights Center estimates that 44% of workers in the U.S. do not participate in a workplace retirement plan. If you’re in this camp, you might be looking for ways to financially prepare for the future. Here are some helpful tips for saving for retirement without a 401(k).
Ways to save for retirement if you don’t have a 401(k)
- Roth IRA
Taxes aren’t exactly the most exciting thing to talk about, but they’re actually very important to retirement planning. When you’re no longer working and are relying heavily on retirement accounts for income, you may be taxed on money you withdraw. This can trigger a significant tax burden during your golden years, which can eat into your savings in a big way. A Roth IRA is an ideal workaround. This type of retirement account is funded with after-tax earnings. That means you can enjoy 100% tax-free withdrawals. You simply open the account yourself, then make regular contributions that feel right to you. Your money is invested in the stock market and can benefit from compound interest, which helps your savings grow faster.
- Traditional IRA
Traditional IRAs are somewhat similar to 401(k)s. They’re funded with pre-tax contributions, then your money ideally grows until you’re ready to tap those funds in retirement. If you’ve got an old 401(k) from a previous employer, a traditional IRA is a great place to roll it over and continue saving. Another benefit is that the contributions you make are tax deductible if you and your spouse don’t have access to a retirement plan at work. That will lower your taxable income today — a big plus during your working years. Just keep in mind that when you retire and begin taking distributions, you will be taxed on those withdrawals.
- Other investment account
You can also open an investment account through a brokerage firm and use it to buy, hold and exchange different securities. That includes mutual funds, stocks and bonds. Unlike traditional IRAs and 401(k)s, there are no income or contribution limits to deal with. You can also dip into these funds whenever you like without penalty. One caveat is that you won’t get any of the tax benefits that come with those retirement accounts. What’s more, you’ll likely be taxed on your investment earnings. A regular brokerage account can still give your nest egg an extra boost. Consider it an add-on to your other retirement accounts.
- Health savings account (HSA)
If you have a high-deductible health plan, you may already have a health savings account (HSA). This type of account allows you to set aside tax-deductible contributions that can then be used to cover qualified medical expenses. It’s a solid way to reduce your out-of-pocket health care costs. The money in this account also grows tax-free. In 2021, you can contribute up to $3,600 into an HSA (or $7,200 for family coverage). Here’s an added upside — once you turn 65, you can use money in an HSA for anything you like. In this way, it can double as retirement income. You’ll be taxed on withdrawals that aren’t used for health care expenses, but it can still be a powerful savings vehicle.
Other ways to prioritize retirement saving
The accounts listed above are designed to help you get the most out of your retirement savings. Another important piece of the puzzle is freeing up money to direct to your retirement accounts. Fidelity Investments recommends saving 15% of your income, but if that feels unreasonable, don’t panic. Every person’s financial situation is unique. At the end of the day, the most important thing is that you routinely set aside some portion of your earnings for retirement. Even if you’re starting small, those contributions will add up over time.
This all begins with budgeting. Look at your monthly spending plan to see how much you can reasonably earmark for retirement. Setting up automatic transfers can help you stick with it each month. You can also balance your retirement contributions with other financial goals you may be working toward, like paying down high-interest debt or building up your emergency fund.
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