You can’t ask, “How should I save for retirement?” without hearing an answer that includes some variation of, “Save money in your 401(k).”
That’s for good reason. 401(k)s give you a tax-advantaged place to save for retirement, and because you fund the account with withholdings from your paycheck, it’s a way to automate what you need to contribute to your nest egg.
Plus, 401(k)s often put free money on the table that’s yours for the taking. That’s in the form of an employer match. When you can access a 401(k), your employer will usually match anywhere from 1% to 6% (or more) of whatever you contribute.
If your employer will match 3% of your contribution, it’s like giving yourself a 3% raise that goes straight to the retirement savings you’ll need in the future.
All of this is great — except for one thing.
What If You Don’t Have a 401(k)?
That advice to save money in your 401(k) assumes you have a 401(k) in the first place. And 41% of Millennials don’t have access to such a plan through their employer.
This puts the burden of funding your own retirement even more squarely on your own shoulders, since you can’t double your savings through a benefit like an employer match.
But don’t get discouraged — or think you don’t have any options. There are still plenty of ways to save for retirement outside of a 401(k) (including options that provide similar tax-advantaged benefits if that’s an important factor for you).
Here’s what else you can do to build your nest egg even if the common refrain to save in a 401(k) just doesn’t apply to you.
Find Out If Your Employer Offers Any Kind of Retirement Account
Just because your company doesn’t provide a 401(k) plan doesn’t mean it doesn’t offer you any options for retirement savings vehicles. Check with your manager or your HR department and ask about retirement accounts and other company benefits you can access.
Your company may offer something like a SIMPLE IRA or a SEP IRA instead — which could still provide matching contributions from your employer.
If that’s still a no-go at your job, it’s time to open an IRA yourself.
Open a Traditional IRA or a Roth IRA
If you want to defer income tax on your retirement savings the same way you can defer it when you contribute to a 401(k), open a traditional individual retirement account, or IRA. You can contribute up to $5,500 per year to this account (or $6,500 if you’re over 50).
The money you contribute is tax-deferred, meaning you’ll get a tax break today but will pay taxes on your withdrawals in the future.
Or, if you’re interested in letting that money grow tax-free, consider a Roth IRA instead. Many of the same rules apply to Roths as apply to traditional IRAs (like the contribution limits). The biggest difference is your contributions are made with after-tax dollars.
The advantage? If you follow the rules, your withdrawals in the future can be made tax-free.
Consider If You Qualify for a SEP IRA
The challenge with traditional IRAs and Roth IRAs is that you can only contribute $5,500 per year (if you’re under 50) to these accounts total. You can have both types of accounts in your name, and you can contribute to both, but the total amount you contribute to all your IRAs added up together cannot exceed $5,500.
In other words, you can put $2,000 in your traditional IRA and $3,500 in a Roth. But you can’t put $3,500 in each account, because you would exceed the $5,500 max contribution limit.
None of this is to say don’t use a traditional or Roth IRA — you could likely benefit from contributing to one or the other if your income doesn’t exceed the limits defined by the IRS — but you should also consider whether you can save for retirement in a SEP IRA.
SEP IRAs are for self-employed individuals, or those making 1099-MISC income. The nice thing here is that you don’t have to be self-employed full-time to use a SEP. You just need to earn some form of 1099-MISC income throughout the year.
You can contribute to both a traditional or a Roth IRA and a SEP IRA at the same time, and the SEP IRA comes with much higher contribution limits than the other two (25% of the employee’s compensation, or $54,000 for 2017, whichever is less).
Still, guidelines about what IRAs you can use and when can get complicated. It’s smart to reach out to a fee-only financial planner who works as your fiduciary 100% of the time to come up with a self-made retirement savings strategy if a 401(k) can’t be your default option.
Take Advantage of an HSA
Health savings accounts are slowly becoming known more and more as useful retirement-savings tools and can be a great vehicle for folks with and without a 401(k).
HSAs allow you to:
- Make tax-free contributions to the account.
- Grow your money without taxes; earnings are tax-free when you use them on qualified expenses.
- Withdraw your contributions and earnings tax-free when used on qualifying expenses.
There are a few catches. We hit on the first already: You need to use this money for qualified medical expenses.
Health savings accounts are designed to help you save funds for health care costs — but that’s why HSAs are ideal for retirement savings, because health care will probably be your biggest expense once you retire.
If you can fully fund your HSA every year from now until retirement, you’ll have a nice little tax-free nest egg to use to pay for medical costs in your elderly years.
The other big catch is that to qualify for an HSA, you need a high-deductible health plan (or HDHP). That’s not necessarily a bad thing, because it usually means paying lower monthly premiums on your health insurance today.
But the deductibles can be hefty, and HDHPs may not make sense for you if you have chronic health issues or frequently visit medical care professionals. If you choose an HDHP, it’s smart to keep an emergency fund that’s big enough to pay the full deductible should you need to.
Don’t Forget about Brokerage Accounts
It’s important to use savings vehicles that can help reduce your tax burden today or in the future, like IRAs and HSAs do. But even more important is the act of saving and investing itself.
Don’t shy away from your regular taxable brokerage account if you’re maxing out an IRA and HSA and still have money you could put away for the future. While it doesn’t offer you a tax advantage, it does diversify the kinds of accounts you have.
Retirement accounts come with a lot of rules and limits, including how much you’re allowed to contribute, when you can access your money, and (in the case of HSAs) how you can spend the money.
Brokerage accounts, on the other hand, are pretty much limitless. You can contribute however much you want and you can use that money any time — which may be useful to you if you’re interested in early retirement or you need that money before retirement age.
Automate Your Contributions
When you decide where and what to save, put those retirement savings on autopilot. Set up an automatic contribution from your checking account to your savings or investment accounts so you fund your nest egg each and every month without fail.
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Taylor Schulte, CFP®, is founder and CEO of Define Financial, a fee-only wealth management firm in San Diego. In addition, Schulte hosts The Stay Wealthy Retirement Podcast, teaching people how to reduce taxes, invest smarter, and make work optional. He has been recognized as a top 40 Under 40 adviser by InvestmentNews and one of the top 100 most influential advisers by Investopedia.