A 401(k) is one of the best ways to save for a secure retirement, but if you work for yourself or a small enterprise, this added perk may not be available to you. However, that doesn’t mean you can’t still save for retirement on your own.
There are several options available to build wealth for your retirement, and just like 401(k)s, many of these vehicles also offer tax savings. We’re breaking down the nine alternative methods to save for your retirement, so you can rest assured that your post-work days are accounted for.
1. Traditional IRAs
A traditional IRA is one of the most common ways to save for retirement. You can invest your IRA in stocks, bonds, mutual funds, cash, annuities and the like, although the IRS doesn’t permit IRAs to invest in most coins or collectibles. If you’re not covered by an employer-sponsored retirement plan at work, you may contribute up to $6,000 annually to your IRA in 2020 and up to $7,000 once you reach age 50.1 These contributions grow tax-free until you begin making withdrawals. Once you turn 72, you are required to take minimum withdrawals from your account.2
For those without an employer retirement plan, the entire amount of a traditional IRA contribution is deductible on your federal income tax return. Once you start making withdrawals, the amount is taxed at your regular tax rate.
2. Roth IRAs
While you can’t deduct contributions to a Roth IRA, this type of retirement savings vehicle offers many advantages. Since a Roth IRA is funded with post-tax dollars, you won’t owe taxes on amounts withdrawn during retirement. Unlike a traditional IRA – or a 401(k) – you don’t have to withdraw money from your Roth IRA account upon reaching a certain age, which makes it a viable savings vehicle for those who may intend to pass the money on to heirs.
You can contribute the same amounts to a Roth as with a traditional IRA. There are income limits for Roth IRA eligibility, which change annually. For 2020, you can contribute the full amount to a Roth IRA if single with an adjusted gross income (AGI) of up to $124,000 and make a partial contribution until your AGI reaches $139,000. For those married and filing jointly, you can contribute the full amount if your AGI is $196,000 or less and make a partial contribution until your AGI reaches $206,000. 3
If you are self-employed, a Simplified Employee Pension (SEP) IRA is available, which is a traditional IRA with identical investment, distribution and rollover rules. For 2020, you can contribute up to 25 percent of your earnings up to $57,000.4 As with traditional IRAs, you must start making withdrawals by age 72.
4. Self-Directed IRAs
A self-directed IRA is a type of IRA through which you can hold unique alternative investments, like real estate, precious metals and cryptocurrency. Following the same eligibility and contribution limits as a traditional IRA, self-directed IRAs are different in that they come with increased rules depending on the type of investment. They also require account holders to primarily manage their accounts, research investment opportunities and understand investment regulations
5. One-Participant 401(k)
Another option for the self-employed is the one-participant 401(k). You can fund this type of 401(k), also known as a solo 401(k), solo-k, or uni-k if your business has no employees other than your spouse. For 2020, you can contribute up to $19,500, or $26,000 if you are 50 or older. With a one-participant 401(k) plan you qualify as both employer and employee, so as an employer you can contribute up to 25 percent of your earnings up to $57,000 to your self-employment 401(k).5
Looking to lock in a steady income stream once you retire? Annuities may be a good option. Once you invest in an annuity it begins making payments to you in the future. A fixed annuity gives you a guaranteed payout, while a variable annuity pays out according to the current state of its underlying investments.
7. Universal Life Insurance
This type of life insurance builds a cash value, which grows tax-deferred. You can take out tax-free loans that aren’t paid back during your lifetime and some of the money that goes to paying back the loan after your demise is the policy’s death benefit.
8. Taxable Investments
If you’re able to save more for retirement than an IRA permits, you’ll have to rely on a taxable investment. Look for investments with low fees and low tax consequences, such as index funds.
9. Make Direct Deposits
One of the benefits of an employer-sponsored 401(k) plan is that the money is taken directly from your paycheck, so you really don’t miss it. You can do the same thing with funds aimed for retirement savings. If you work for an employer, consider establishing a direct deposit account from your paychecks into some form of investment vehicle. This way, you are sending monthly contributions directly to your IRA account.
If your company doesn’t offer a 401(k) plan, there are still many avenues to save for retirement. You can even consider utilizing multiple vehicles according to your needs and capabilities. However, it’s important to educate yourself and speak with a trusted financial professional as some methods may be more fit for you than others depending on your income, age and employment.
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Since 2004, TCM Wealth Advisors has been providing fee-only fiduciary advice to our clients in Northeast Ohio and all across the country.