An employer plan like a 401k or 403b is the most common way to save for retirement. But what if you aren't offered a retirement plan through your work?
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The most common way to save for retirement is through an employer sponsored plan, like a 401k or a 403b. For many, this is their sole source of retirement savings.
But what happens if you don’t have access to a 401k or 403b?
According to 2018 research by Congressional Research Service, only 64% of workers in the U.S have access to a Defined Contribution Plan (401k, 403b or 457b) and of that, only 47% are participating.
Does this mean the majority of Americans are not saving anything for retirement?
If you find yourself in this position, it might be time to start socking away money for your future. Not only have the use of pension plans dramatically decreased over the decades, but funding for Social Security isn’t looking very promising either as time goes on. With anticipation of Social Security only being fully funded until 2035, this further puts the need of saving for retirement on the individual.
If you are in the 64% of American workers who do have access to an employer sponsored plan, like a 401k or 403b, you should make sure you are participating. Many employers offer matching, which means they will match your contributions up to a certain amount. This is essentially free money, something you do not want to be leaving on the table. If you don’t think you are enrolled, make sure you check with your HR department and get it set up ASAP.
If you are in the percentage of workers who don’t have access to an employer plan, what are your options? You will need to retire eventually, and if you don’t have a 401k with a free match, don’t have a pension, and are unsure of what Social Security will be able to offer in your older years… what do you have? What will you live on?
A traditional IRA can be opened by anyone with earned income (children under 18 must have a guardian on their account) and 2019 contributions are up to $6,000, or $7,000 if over age 50. While the contribution limit is much smaller than the $19,000 annual limit (as of 2019) for an employer sponsored plan, it is still a significant amount of money. If you are able to max out a Traditional IRA for several decades before retiring, you could find yourself with a substantial amount.
If you are over age 50 and are feeling behind on your retirement savings, you should try and take advantage of the extra $1000 you get, and contribute the full $7,000 for 2019.
The tax benefits on a Traditional IRA are similar to an employer plan, you can deduct your annual contributions from that years taxable income, and the money in your IRA will grow tax-deferred until you pull it out. When you pull the money out in retirement, it will be taxed as income. Currently, you cannot take your money out of your tax-deferred IRA accounts until age 59 ½, otherwise you will incur an additional 10% penalty.
The Roth IRA has similar rules to the traditional, with some major tax differences. Instead of deducting contributions from your taxable income the year they are made, Roth contributions are considered after-tax. After-tax contributions means you pay the tax now, in exchange for tax-free withdrawals in retirement.
You can contribute up to $6,000 (or $7,000 if over age 50) for 2019, but there are income thresholds to keep in mind. If you file taxes as a single person and your modified adjusted gross income (MAGI) is over $137k (or 203k if married filing joint) for 2019, you are not eligible to contribute to a Roth directly. If your MAGI is under $122k as a single filer (or under 193k if married filing joint) you are eligible for the full contribution. If your income is somewhere in-between, you will be in the “phase-out” period, where the contribution amount is reduced.
The Roth IRA also carries a 5-year rule, which means the account must be opened for 5 years before you can withdraw the earnings. However, contributions can be withdrawn without penalty, since this money has already been taxed.
If you are self-employed, you have a few more options in regards to retirement accounts. Be sure to check out this free online course: Crash Course in Retirement for Entrepreneurs, which will explain all of your options, and how to get started.
The two above accounts are specifically designed for retirement funds, but if you are in need of putting more away for retirement than the annual contribution limit of $6,000/$7,000 and you don’t have access to an employer plan, you might be wondering where the next best place is to save.
Besides tax benefits, IRA’s provide a lot of potential for growth, because the money inside can be invested. Opening a non-qualified (meaning there aren’t tax benefits) investment account can give you access to better returns than what a savings account could provide, which is important to consider- especially if you are playing the catch-up game to prepare for retirement.
There are no tax benefits in a non-qualified account, and any withdrawals will be subject to either short or long term capital gains tax. There are also no limits to how much you can contribute in a given year, nor are there rules for when or how you want to withdraw your money.
Opening a non-qualified account will give you the ability to invest additional money, earmarked for retirement. Keep in mind, the closer you are to retiring, the more conscious you should be of your investment strategy, and the risk you are taking on within your accounts.
The three accounts mentioned above can be opened online with a number of custodians, all within minutes. Once you have your account established, the best path to saving is through consistency. Most places you will be able to link your bank account directly, and set up automatic contributions.
If you are overwhelmed at the idea of establishing these accounts and investing on your own, you might consider working with a financial advisor, someone who will open the accounts and manage the investments inside on your behalf. If you would like to learn more about a fiduciary advisory relationship, click here!
If you have any questions, please feel free to reach out to me at firstname.lastname@example.org.
To learn more about saving for retirement and open your own account, enroll in my FREE online course: Crash Course in Retirement for Entrepreneurs.
Congressional Research Service. Worker Participation in Employer-Sponsored Pensions: A Fact Sheet. Updates 04/30/2019. https://fas.org/sgp/crs/misc/R43439.pdf
Social Security Administration. Social Security 2019 Trustees Report. 04/22/2019. https://blog.ssa.gov/social-security-2019-trustees-report/