No employer-sponsored retirement plan? Your other options


Question: Daniel in Cincinnati: How should someone without a 401(k) save for retirement? My 25-year-old son just started a new job, but he doesn’t have access to one.

A If you’re a regular reader of our column, you know that we repeatedly promote taking full advantage of any employer-sponsored retirement plan (such as a 401(k) and/or Roth 401(k)). But the reality is, just like your son, not everyone has access. According to the American Retirement Association, more than five million U.S. employers do not offer such a plan to their employees. However, thankfully, there are alternative ways to save for the future. 

One option is to save in a traditional Individual Retirement Account (IRA). In most cases, this type of account is funded with pre-tax money which will lower his taxable income. He’ll then pay ordinary income taxes on withdrawals in retirement. The 2020 contribution limit is $6,000 since he’s younger than age 50.

An even better option – given his young age and the fact that tax rates are at historically-low levels – is to save in a Roth IRA. This version of an IRA is funded with after-tax money and grows tax free. (Note: the $6,000 annual IRA limit applies to both a traditional IRA and Roth IRA combined.) 

If he’s able to save more than $6,000 a year, an additional option is to save in a “taxable brokerage account.” But the name shouldn’t scare him (or you) away. Because, at some point, Uncle Sam gets his money no matter what kind of retirement account we’re talking about! In this case, he wouldn’t get an up-front tax break like with a traditional IRA nor would he get any tax-free growth like with a Roth IRA. Instead, once he sells any long-term gains, they’ll be subject to the long-term “capital gains” tax rate – which has historically always been lower than ordinary income tax rates. Plus, there are no penalties for withdrawing money early from a taxable account. 

All three of these types of accounts can be opened through any brokerage firm, such as Vanguard, TDAmeritrade, or Fidelity.

Here’s the Simply Money Point : The lack of an employer-sponsored retirement plan should never be an excuse not to save for retirement. We’re glad you’re helping him explore his other options.

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