No 401(k)? No Problem. Alternative Ways to Save for Retirement

If your friends and family talk about how well their 401(k)s are doing and you don’t have one, it can be a lonely feeling.

A 401(k) is a popular tool that many people use to save and invest for retirement. These employer-sponsored retirement plans offer many advantages when you’re saving for retirement, including the ability to make pretax contributions automatically from your paycheck and let your investment earnings grow tax free until retirement. In some cases, your employer might even match your contributions, which can sometimes be an incentive to save more.

But what if you’re self-employed, or among the tens of millions of American workers whose employer doesn’t offer a 401(k)?

Not to worry. There are several alternatives that can help you save for retirement. Creating your own retirement plan may take a little more effort and discipline on your part, but if you don’t have a 401(k) from your employer, here are some choices to think about.

How to save for retirement without a 401(k)

An individual retirement account (IRA) might be worth considering if you don’t have 401(k) access. Similar to a 401(k), IRAs offer various tax advantages. Depending on the type of IRA you choose, you may not have to pay income taxes on your IRA contributions until you withdraw the money, usually at retirement. In 2023, you can contribute $6,500 annually to an IRA ($7,500 if you’re 50 or older).

You have a few different IRAs to choose from, depending on your income and employment status. You’ll need to decide which type of IRA works best for you before opening an account. After deciding which IRA is right for you, it’s easy to open one at a bank or investment company, in person, or online. Depending on the amount you plan to contribute initially, you may want to find one that has a low account opening minimum.

Traditional IRA: A traditional IRA works like a 401(k)—your contributions and any earnings on your contributions are not taxed as long as the money stays in the account. Distributions are taxable and may be subject to a 10% penalty if you withdraw your savings before age 59 1/2. Your contributions may also be tax deductible on your federal tax return if you meet certain criteria like not being covered by a retirement plan at work. If you (or your spouse) are covered by a workplace retirement plan, then your modified adjusted gross income (MAGI) needs to be below a certain threshold to deduct your contribution.

Roth IRA: You don’t get any up-front tax savings with a Roth, but your investment grows tax deferred, and withdrawals after age 59 1/2 aren’t taxed either. If you think you might be in a higher tax bracket at retirement, it may be beneficial to contribute to a Roth and be able to pull the money out tax free later.

Roth IRAs offer an additional benefit that 401(k)s don’t: Because you contribute to a Roth IRA with after-tax dollars, you can withdraw that money at any time without paying a penalty. You’re only penalized if you withdraw the Roth investment earnings before age 59 1/2 and/or you’ve held the account for less than five years.

Keep in mind, your ability to contribute to a Roth IRA depends on your income and tax-filing status. In 2023, you can contribute up to the maximum annual limit ($6,500/$7,500) if you’re married filing jointly and your MAGI is less than $228,000, or less than $153,000 for single filers. A Roth IRA can be a good savings tool for those who fall within the income limits and don’t need the up-front tax break.

Simplified Employee Pension (SEP) IRA: If you’re self-employed, own a business, or have income from a side hustle, a SEP-IRA may be a viable way to set aside money for retirement. A SEP-IRA is subject to the same investment and withdrawal rules as a traditional IRA. However, you can contribute much more than the $6,500 limit (for those under 50). In 2023, you can save up to $66,000 or 25% of your eligible business income, whichever is less, in a SEP-IRA.

SIMPLE (Savings Incentive Match Plan for Employees) IRA:A SIMPLE IRA is another retirement savings account that’s typically offered to employees of small businesses. Like a 401(k), a SIMPLE IRA lets you save pretax dollars up to $15,500 (or $19,000 for those 50 and over) in 2023. Your employer can also make matching contributions on your behalf, dollar-for-dollar, up to 3% of your pay (as long as you also contribute at least 3%), or up to 2% of your pay if you don’t contribute (up to maximum annual earnings of $330,000 in 2023). In order to offer a SIMPLE IRA, an employer must have 100 or fewer employees and can’t offer any other type of retirement plan. If you’re self-employed with employees, this is another plan to consider.

Other alternative ways to save for retirement

Solo 401(k): If you’re self-employed and don’t have employees, a Solo 401(k) could be the retirement savings solution for you. It offers the same tax perks as an employer-sponsored 401(k) plan. You can contribute up to $66,000 to a Solo 401(k) in 2023 (and make an additional $7,500 in catch-up contributions if you’re 50 or older). In many instances, you can also make Roth after-tax contributions to a Solo 401(k) if you’d prefer to withdraw your savings tax free at retirement—but not all providers offer this Roth option.

Remember, all these tools help you invest, not just save. Depending on your age and investment priorities, you can choose broad-based stock mutual funds or exchange-traded funds that represent different companies, industries, and countries. Or you could invest in what’s called a target date fund that corresponds with your retirement date. When you open your IRA, consider talking to a representative about investment choices.

Health Savings Account (HSA): If you have a high-deductible health plan at work, you may be eligible to contribute to an HSA. Although HSAs were created to help workers set aside money for qualified health expenses, they can also be used to save for retirement. HSAs offer a triple tax benefit: Your contributions are tax deductible, investments grow tax deferred, and withdrawals are tax free when used toward qualified medical expenses.

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An emergency fund isn’t just a repository of cash you can dip into when the tires wear out or the dishwasher breaks down. Those emergency dollars may actually be critical to your overall investing strategy, whether or not you have access to a 401(k).

The last thing you want is to invest in the markets and have to dip into your investment portfolio at a loss. If your investment portfolio drops and you don’t have an emergency fund, you might panic, capitulate, and sell at the worst possible time.

What about other important priorities, like paying off college debt, saving for a down payment on a house, and building education and retirement savings? Again, all that is important, but having emergency cash is a key short-term priority because without it, longer-term goals could get dinged.

Consider putting your goals into short-term, intermediate-term, and long-term buckets. The short-term budget includes emergency savings. Intermediate goals may include buying a house and paying for college.

A critical long-term goal is retirement. But if you have no 401(k) and need to dip into those IRAs and HSAs to pay for something that’s in the shorter-term bucket, such as a surprise car repair bill, you’re potentially damaging long-term savings. Any retirement plan needs to rest on a solid foundation, which is why an emergency fund is so important.