When you want to save for retirement but find that your employer doesn’t offer a 401(k), it can be disappointing. The good news is that there are 401(k) alternatives where you can put your retirement money and earn considerable interest.
Choose a Solo 401(K)
Besides an employer’s 401(k), the best way to save for retirement would probably be to set up a solo 401(k), also known as a single member 401(k). The only requirement is that you must be a business owner without any employees. Another good news is that your spouse is not considered an employee.
MySolo401k mentions that the money you put into a solo 401(k) account must be self-earned. It can come from a limited liability company, an S corporation, a C corporation, a sole proprietorship or a limited partnership, but it must come from the “earned income” that you generate.
You can make contributions to a solo 401(k) even if you work full time. Money earned from side work or part-time self-employment (if you work alone) can be placed in this type of account. You can also have a 401(k) through your full-time employer and a solo 401(k), but you cannot exceed the maximum contributions allowed for them.
Contribution limits for 2023 in a solo 401(k) are $22,500 or $30,000 if you’re 50 or older. RamseySolutions says you can contribute up to 25% of your income, but you can’t exceed $66,000 per year. A solo 401(k) is a great option because you can put a lot more money into the account than you can in an IRA.
When you choose your self-employed 401(k), you can get either a traditional 401(k) or a Roth 401(k). A traditional 401(k) takes pre-tax contributions, before you pay taxes on the money, but you’ll pay taxes on withdrawals. This may be the best choice if you expect your retirement income to be lower. It will also allow you to have a larger salary each month.
A Roth 401(k) accepts after-tax contributions, which means you pay taxes on the money before you contribute and withdrawals are tax-free. This method reduces your monthly income now, but will give you larger withdrawals in retirement.
An Individual Retirement Account (IRA)
Another alternative to a 401(k) is the IRA. You can contribute to a traditional IRA with pre-tax dollars. It allows you to deduct the amount contributed from your income. You will pay taxes when you withdraw the money from the account.
BankRate says one of the benefits of an IRA is that it gives you “an almost unlimited number of investments” to choose from. You will need to decide how to invest the money, or you can choose to have someone else do it for you.
A Roth IRA
The Roth IRA is a step above a traditional IRA because it gives you some nice additional benefits. You’ll pay tax upfront on all contributions, but you won’t pay any when you withdraw the money after age 59.5. Investopedia says you must have had the account for five years before doing this.
Another nice perk is that you can withdraw money from the account without any penalty, which you can’t do with a traditional IRA. BankRate says you can withdraw all money from contributions without penalties, but you cannot withdraw money earned from the account.
Another advantage is that you are not required to take any required minimum distributions (RMDs) when you reach age 72. You can also continue to make contributions after reaching this age.
You can contribute up to $6,500 in 2023. If you’re over age 50, you can also make catch-up contributions of an additional $1,000 per year, for a total of $7,500.
A Roth IRA has certain eligibility requirements based on your income. If you are married and filing jointly, you can contribute to a Roth IRA if your modified adjusted gross income is less than $218,000 in 2023. Singles can contribute if they earn less than $138,000.
If you are married and have a non-working spouse, you can open a joint IRA. RanseySolutions claims that this type of IRA saves you twice as much money, which is beneficial because IRAs offer much smaller limits than 401k.
Simplified Employee Retirement IRA (SEP IRA)
The SEP IRA is a retirement savings plan that allows small business owners to contribute to the retirement of their employees. The self-employed can also benefit from this plan.
The main advantage is that it gives you a much higher contribution limit than any other IRA. As a solo 401(k), you can contribute up to 25% of your income, or a maximum of $66,000.
One important thing to know about this type of account is that you must give your employees the same percentage of your salary for their contributions. If you contribute 10% of your salary, you must also contribute 10% of their salary to their funds.
A taxable brokerage account
Fool mentions another option. You can also make contributions to a taxable brokerage account. If you receive dividends, you will have to pay taxes each year. If you invest in stocks that don’t pay dividends, you won’t pay any tax until you sell stocks and make a profit.
These are just a few ways to save for retirement, without the employer’s 401(k). You can use one or more of the above accounts to build yourself a safe and comfortable retirement. Start as early as possible so your money has time to earn more.
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