Saving for retirement is an important part of a long-term financial plan, even if you don’t get help with a 401 (k) through work.
In 2020, about 33% of workers in the private sector did not have access to an employer-sponsored pension plan, according to data from the Bureau of Labor Statistics. Part-time workers, those in service industries, and those with the lowest wages were the least likely to have some form of retirement savings assistance from their employer.
Fortunately, there are ways to save for retirement outside of a traditional employer-sponsored 401 (k) plan.
Roth and traditional IRAs
Often the first thing advisers recommend for those without employer-sponsored 401 (k) is to open a Roth individual retirement account, into which you would make your own contributions with after-tax dollars.
âI love the Roth IRA for young investors,â said Tess Zigo, certified financial planner at Emerge Wealth Strategies in Lisle, Illinois, adding that this is because young people are generally in a low bracket. lower tax at the start of their career. later.
Saving money in a Roth IRA means the funds will grow tax-free, meaning you won’t have to pay anything to withdraw the money in retirement. People using a Roth IRA can also set aside a nice amount of money each year. In 2021, the total you can save in a Roth IRA is $ 6,000, or $ 7,000 if you’re 50 or older.
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Of course, there are some limitations. In 2021, your adjusted adjusted gross income must be less than $ 140,000 for single filers and $ 208,000 for married ones filing jointly to qualify.
If you have taxable earnings, you can also save for your retirement in a traditional IRA, which allows you to defer taxes, such as a 401 (k). It makes sense if you are in a higher tax bracket now than you will be later. In 2021, the contribution limit for a Traditional IRA is $ 6,000 or $ 7,000 if you are 50 or older.
And, if you or your spouse doesn’t have 401 (k) from work, some contributions you make to a traditional IRA are deductible, depending on other aspects of your finances.
One of the benefits of these accounts is that they can give investors more freedom in deciding how to invest their money than a traditional employer sponsored 401 (k). In an IRA, investors can typically select their own stocks, bonds, mutual funds, exchange-traded funds, and more, instead of choosing from a limited number of options through their plan.
âYou really have a full open architecture in terms of what you can invest in with a Roth IRA,â said Rob Greenman, CFP and director of growth and partner at Vista Capital Partners in Portland, Oregon.
Of course, this could also be a problem for investors if they try to time the market, choose risky investments, or don’t have a well-balanced portfolio, he said, so caution is always in order.
Regular brokerage accounts
If you don’t want to open an IRA, you can also save for your retirement in a traditional brokerage account, where you can still invest in the markets to make your money grow over time.
This option would give you the most freedom in terms of contributing and withdrawing, but also mean that you wouldn’t get the tax benefits you would see in an IRA. If you trade on a regular brokerage account often, you might face a big tax bill, which won’t happen if you use a Roth IRA.
âThe only thing that is better than membership is tax-free membership,â Greenman said.