Retirement Plans for Workers Who Don't Have a 401(k)
Make use of one of these three plans if you are eligible to contribute.
Just because you don't have a 401(k) doesn't mean you can't retire in style. Some types of employer-provided retirement savings plans allow you to save even more than you can with a traditional 401(k). Here's a look at what's out there:
403(b) plans. These plans, typically offered to teachers, resemble 401(k) plans, with the same tax benefits, maximum contribution thresholds and catch-up contributions. Unfortunately, that's where the resemblance ends. While private-sector plans usually contain a suite of mutual funds selected by a management committee, the primary offerings in many 403(b) plans are high-cost investments, such as equity-indexed annuities. That's because many school districts have little desire to negotiate with financial-services firms. Rather, they turn the job over to sales agents who peddle investments that deliver the highest commissions, not necessarily the best results.
But there have been some positive developments. Last year, the board of education in Montgomery County, Md., contracted with no-load mutual fund company Fidelity Investments to administer its 403(b) plans. In other parts of the country, educators are lobbying for better options.
For advice on how to advocate for a better plan, go to www.403bwise.com. In the meantime, teachers with a lackluster plan may be better off investing in a Roth IRA. In 2016, you can contribute up to $5,500, or $6,500 if you're 50 or older.
457 plans. These plans are typically offered to workers in the public sector. They're similar to 401(k) plans, with a couple of key differences that are particularly beneficial if you're approaching retirement. In 2016, the maximum contribution is $18,000, plus $6,000 in catch-up contributions for workers age 50 or older. But workers who are 50-plus have an alternative that allows them to supercharge their savings. Instead of making catch-up contributions, workers within three years of their "normal retirement age" -- typically the age at which they can collect unreduced benefits from their pensions -- can double the $18,000 basic maximum contribution for three years, as long as they haven't maxed out contributions in the past. Three years of $36,000 contributions would allow you to shovel up to $108,000 into your plan.
Solo 401(k) plan. These retirement savings plans are designed for self-employed people who have no employees other than a spouse. They're more complicated than SEP-IRAs, another savings tool for the self-employed, but if you can afford it, you can put aside a lot more money because you can contribute as both an employer and an employee. In 2016, the maximum contribution is $53,000, or $59,000 if you're 50 or older.
Another plus: You can borrow from your solo 401(k), as long as the provider allows it (not all do). In most cases, you can borrow up to 50% of the balance. In addition, you can invest some or all of the employee contribution (up to $18,000 plus catch-up contributions of up to $6,000) in a solo Roth 401(k), if your provider offers that option. Contributions to a solo Roth are after-tax, but once you retire, withdrawals will be tax-free. And unlike with regular Roths, there are no income restrictions on contributions to a Roth 401(k).
In the past, solo 401(k) plans were often burdened with high fees, but that's no longer the case. Financial firms such as Fidelity Investments and Vanguard Group offer solo 401(k) plans with low (or no) set-up costs and administrative fees.