As traditional pensions have disappeared, many workers expect to rely heavily on a 401(k) as their primary source of income in retirement. But not everyone has access to an employer-sponsored plan. Roughly 30% of employers—most often small businesses—don't offer retirement benefits to employees, according to the Transamerica Center for Retirement Studies. And those who are self-employed are also on their own when it comes to saving for retirement.
If you're in one of these groups, you have options. And, just as it is for people with employer-offered plans, the sooner you start saving, the better positioned you'll be when you retire.
Traditional IRA. Individual retirement accounts, or IRAs, were established by the Employee Retirement Income Security Act of 1974. The law allows you to funnel money into a tax-deferred account held at a brokerage firm or bank. If your employer doesn't offer a retirement plan, or you work for yourself, contributions are tax-deductible. You have a slew of options for investing the money in the account, including stocks, bonds, mutual funds, exchange-traded funds and other investments that fit your long-term goals.
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You have until April 15, 2020, to set up and fund an IRA for 2019. Workers younger than age 50 who don't have a retirement can sock away up to $6,000; those who are 50 and older can put away an additional $1,000 in catch-up contributions, for a total of $7,000. (The maximum contribution is the same for 2020.) You cannot contribute more than you earn, however. So, for example, if you made $5,000 working part-time in 2019, your contribution limit is $5,000.
A single 30-year-old expecting to retire at age 67 could amass $1 million if she contributes the maximum and earns an average annual return of 7% over the 37-year period. If the 30-year-old pushes retirement off until age 70, she could save more than $1.2 million. Remember that you can always (and should) scale up your contributions if you can't max them out when you start.
If you're married and have earned income of your own, you can contribute to your own IRA even if your spouse has access to a retirement plan at work. For 2020, if your spouse has a retirement plan at work and you file a joint tax return, you can take the full deduction if your combined adjusted gross income is less than $104,000. If your AGI is more than that, but less than $124,000, you can still receive a partial deduction. The deduction is phased out completely if your AGI exceeds $124,000.
If one spouse has no income—the spouse is a caregiver, for example—then the working spouse can contribute to the nonworking spouse's IRA as long as they file a joint tax return. For 2020, you can deduct the full contribution if your combined AGI is $196,000 or less; if your AGI is between $196,000 and $206,000, you can claim a partial deduction.
The Roth option. If you want to avoid paying taxes in retirement, you can contribute to a Roth IRA. Contributions are after-tax, but as long as you're 59½ and have held the account for at least five years, withdrawals are tax-free. For young workers who can benefit from many years of tax-free growth, a Roth may be a better way to go, says Chad Parks, CEO and founder of Ubiquity Retirement + Savings, an online retirement service for small businesses.
Roth IRAs have income limits on contributions. A married couple filing jointly must have an adjusted gross income of less than $196,000 ($124,000 for single filers) to contribute the maximum of $6,000 ($7,000 for those 50 or older). Contributions begin to phase out once AGI exceeds those levels; married couples with AGI of more than $206,000 and singles with AGI of more than $139,000 can't contribute to a Roth.
Supercharged plans. Independent contractors and small-business owners who want to put away even more for retirement have two other options.
A solo 401(k) works best for those who are self-employed because it lets you contribute as both an employee and the boss. For 2020, the maximum amount you can contribute if you're younger than 50 is $57,000. If you're age 50 or older, you can put in an additional $6,500, which brings the total to a whopping $63,500.
It works like this: You can contribute up to $19,500 as an employee (or $26,000 if you're 50 or older), even if that's 100% of your self-employed earnings for the year. You can then add up to 20% of your net self-employment income as an employer. In most cases, contributions are pretax, so stashing money in your solo 401(k) will significantly reduce taxes on your self-employment income.
You have until April 15, 2020, to contribute to your solo 401(k) for 2019, as long as the account was set up by December 31, 2019. The 2019 limits are $56,000 if you're under 50; $62,000 if you're 50 or older.
If you plan on hiring a small group of employees, you should consider a simplified employee pension, or SEP IRA. With this plan, only the employer is allowed to make contributions—to his own account and his employees' accounts. A self-employed business owner can put up to 20% of his net income into a SEP IRA for himself, as well as up to 25% of an employee's compensation into the employee's account.
That was a big reason Anna DiTommaso, the founder of web-design agency Creative80, based in Dallas, started a SEP IRA for her company in 2013, when she was 25. With two full-time employees, she can set up the plan to be as generous as she wants. "I also like that you don't have to commit to contributing," she says. "Plus, I have some flexibility on when new employees can participate."
State help. Recently, states have started sponsoring their own retirement plans for workers who don't have access to a 401(k) through their employer. One of these could help you get started if you're not inclined to set up your own account.
For example, with California's CalSavers, unless an employee chooses their own contribution rate, 5% of your pay is automatically deposited into a Roth IRA and contributions are increased by 1% each year until you're saving 8% of your income. The plan was launched as a pilot program in late 2018 and rolled out to all eligible employers July 1, 2019.
Other states that offer their own retirement plans, or are working to implement one, include Connecticut, Illinois and Oregon.
Set up an account
If you're looking to set up your own retirement savings plan, you have plenty of low-cost choices.
Fidelity offers both a traditional and a Roth IRA option with no minimum balance or annual fee. And recently, the broker eliminated the $4.95 commission to trade stocks, exchange-traded funds and options. Some investments, such as mutual funds, may require an initial minimum investment. Fidelity also offers a SEP IRA and a solo 401(k).
Charles Schwab offers traditional and Roth IRAs as well, with no-fee trading for stocks, ETFs and options. Both accounts require no minimum balance to open (though mutual funds may have minimum initial investments) and no maintenance fees.
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