How to save for retirement without a 401(k)?

The best way to save for retirement involves minimizing your tax liabilities and long-term investing. For example, the 401(k) plan is one of the best retirement savings strategies due to its tax advantages, employer match, and higher contribution limits. Most people settle for jobs that offer 401(k) retirement plans. Unfortunately, not every company offers retirement plans.

How can you save for retirement if you don’t have access to 401(k) plans?

If your job does not offer 401(k) plans and similar benefits, there are different ways to save for retirement.

Here are retirement saving strategies without a 401(k).

Table of Contents show

1. Individual retirement accounts (IRAs)

Individual retirement accounts(IRA) are direct alternatives to 401(k) plans. If you don’t have a 401(k) plan through your company, consider opening an IRA. There are two different IRAs that you can choose from which are Traditional IRA and Roth IRA.

Traditional IRA

A traditional IRA is a retirement account where your contribution can be tax-deductible. The deductible amount and eligibility for deduction depend on your income limits and filing status. There are no income limits to making contributions to a traditional IRA. The traditional IRA is a great way to save for retirement without a 401(k) plan because it gives you tax benefits that resemble 401(k) plans.

When you have a traditional IRA, you grow your retirment savings on a tax-deferred basis and pay applicable tax during retirement. If you don’t have a 401(k) plan, all contributions to your traditional IRA will be deductible.

For 2024, the contribution limits to traditional IRA are $7,000 or $8,000 if you are 50 or older. For 2023, the traditional IRA contribution limits are $6,500 or $7,500 if you are 50 or older.

Roth IRA

The Roth IRA is another retirement account you can use to save for retirment when you don’t have a 401(k) plan. This account is similar to a traditional IRA in some ways. The biggest difference between a traditional IRA and a Roth IRA is when tax benefits are realized.

The Roth IRA does not give you upfront tax benefits because every dollar you contribute to the account comes from your after-tax paycheck. The benefit of this account is that you grow your savings tax-free and withdraw your money tax-free during retirement. On top of this, the Roth IRA does not come with RMDs. You can also transfer the account to your beneficiaries tax-free. This makes the Roth IRA a great retirement saving plan when you don’t have a 401(k).

All contributions to your Roth IRA come from after-tax money. For 2024, you can contribute up to $7,000 or $8,000 if you are 50 or older. For 2023, maximum contributions to a Roth IRA are $6,500 or $7,500 if you are 50 or older.

When can you withdraw money from your IRAs?

Before you take distributions from an IRA, make sure that you understand its terms and conditions. To withdraw money from your IRA without an early withdrawal penalty, you must be at least 59½. Any contributions you make to your Roth IRA can be taken out at any time tax-free.

If you delay withdrawing money from a traditional IRA, you will be required to start taking RMDs when you turn 73. Failure to take RMDs can result in a 25% tax on the money you did not distribute on time. If you fix the RMD error within 2 years, the penalty will become 10%.

You might like: How to transfer a traditional IRA to a Fidelity IRA

How much can you contribute to an IRA in 2024?

Unlike 401(k) plans where you have higher contribution limits, IRAs come with much lower limits. For 2024, you can contribute up to $7,000 to your IRA. If you are 50 or older, you get an extra $1,000 catch-up contribution. Although these limits are much lower, IRAs are the perfect alternatives to saving for retirment without a 401(k) plan.

2. Health Savings Account(HSA)

Another great alternative to save for retirment without a 401(k) is the Health Savings Account(HSA). Typically, an HSA is designed specifically for health-related expenses. If you use HSA funds for non-medical-related expenses, it results in paying taxes and applicable penalties.

The good news is that there is a way around this rule. Instead of taking the money out of an HSA, continuously save money in the account until you have reached retirement age. Once you have reached retirment age, you will have the option to use the funds for non-medical expenses without a penalty.

If you can wait until you have turned 65, you can still use the money tax-free and penalty-free on healthy-related expenses. However, if you choose not to use the money on medical-related expenses, you can withdraw the money without a penalty as long as you are at least 65. You will only pay taxes on the amount you withdrew from the account. Hence, giving you the same benefits as a 401(k) plan.

While contributions to an HSA account do not match employer-sponsored plans, you can still use an HSA to help save for retirement when you don’t have a 401(k) plan. For 2024, you can contribute up to $4,150 for self-only coverage and $8,300 for family coverage. To qualify for an HSA, you must be enrolled in a high-deductible health Plan(HDHP).

Benefits saving in HSA when you don’t have a 401(k)

Save money on taxes
An HSA helps you save for medical expenses
You can earn interest on the money
The account can be used to save for retirment

The similarity between HSA and traditional IRA

These two accounts are completely different and designed for different purposes. However, there are some similarities between HSA and a traditional IRA.

Investment options. The money in an IRA or HSA account can be invested.

Tax benefits. Traditional IRA contributions might be tax-deductible. If you don’t have a 401(k) with your employer, all IRA contributions will be tax deductible.

Federal Income tax. You pay income tax when you are taking withdrawals from these accounts. A 10% penalty will be applied when you withdraw money from your IRA before you turn 59½. For the HSA, you will pay a 20% penalty if you use the money for non-qualified medical expenses and you are not 65.

HSA eligibility

Not everyone can make contributions to HSAs. To qualify for an HSA, you must be covered by a High Deductible Health Savings Plan(HDHP). Also, the deductible amount must be at least:

$1,400 for single or
$2,800 for family

The HSA account is different from your Flexible Savings Account (FSA). Typically, you lose the money in your FSA account if you don’t use it by the end of the year’s plan. Some employers may give you 2.5 months to spend the money.

For an HSA, on the other hand, the money in the account stays there indefinitely without losing it. This makes the HSA a great way to save for retirement without a 401(k).

HSA contribution limits

HSA is a great way to save for retirement without a 401(k) plan due to its tax benefits and meaningful contribution limits. For 2022, the maximum contributions you can make to HSA are:

$$4,150 for single coverage
$8,300for a family coverage

If you are 55 or older, you will get an extra $1,000 catch-up contribution.

3. Invest in real estate

Another great way to save money for retirment without a 401(k) plan is to invest your money in real estate. Real estate is a great sector for people who want to grow their retirement savings and also build wealth at the same time.

There are many ways you can invest in real estate. You can invest in rental properties or other forms of physical estate if you are interested in cash flow. But, if you don’t want to deal with tenants and active management of your properties, look into Real estate investment trusts (REITs), Real estate mutual funds, and ETFs.

Saving for retirement is more about preserving the original capital while earning a return. Real estate investments check these boxes.

4. Tax-deferred annuities

Annuities are investment options offered through insurance companies to protect you from the risks of outliving your money. Due to their tax benefits and investment opportunities, annuities are great ways to save for retirement without a 401(k) plan.

Annuities come in many forms including variable-interest rates, fixed-interest rates, and indexed rates. The money you put into annuities grows on a tax-deferred basis. However, you pay income tax when taking distributions from your account.

5. Open a taxable investment account

The last tip you can use is to use taxable investment accounts. For example, you can open a brokerage account where you buy and hold or sell investments of your choice. Inside your account, you will have a variety of investment options to choose from.

You can buy and hold different investments for a long time. This comes with two benefits.

Growth. If you buy investments that grow in value such as stocks, your retirement savings will also increase.
Cash flow. Some investments come with a consistent supply of cash flow. For example, if you buy dividend stocks, you will collect quarterly dividends from the stocks you hold. You can also have both growth and cash flow at the same time.

Investing in stocks comes with high volatility and risks compared to standard retirement plans. For this reason, it is crucial to stick to long-term investments to mitigate the impact of short-term fluctuations on your portfolio. Having a financial advisor is also something you should look into if you want to minimize the risks and ensure the consistent growth of your nest egg and its safety.