When it comes to saving for retirement, most advice revolves around contributing to a 401(k) plan or a retirement account offered by your employer. But what if you don’t have access to a retirement plan through work?
Don’t worry, there are still options available to you with special tax benefits. Here’s where you can start:
Individual retirement account
An individual retirement account (IRA) is available to anyone with earned income from a job or business. It’s important to note that income from investments or government benefits does not qualify as earned income.
The key benefits of saving for retirement in an IRA include tax advantages and tax-deferred growth. There are two main types of IRAs:
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Traditional IRA. This type of IRA provides a tax break for contributions, potentially lowering your taxable income for the year.
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Roth IRA. Although there are no immediate incentives for contributing, withdrawals during retirement are tax-free.
An overview of traditional vs. Roth IRAs
Additionally, there are specialized IRAs for specific situations, available in traditional or Roth forms. These include:
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Spousal IRA. Nonworking spouses can open a spousal IRA in their own name to save for retirement, subject to specific guidelines regarding the working spouse’s income.
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Custodial IRA. An IRA established for minors with earned income, managed by a custodian until the child reaches adulthood.
Self-employed retirement plans
If you’re self-employed, run your own business, or have a freelance gig, there are retirement accounts tailored to your situation. Each plan comes with its own features, advantages, and considerations based on your business income and number of employees.
Moreover, these plans allow you to contribute as both an employer and employee, maximizing your retirement savings potential.
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Solo 401(k). Designed for business owners and self-employed individuals without employees (excluding spouses).
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SEP IRA. Ideal for self-employed individuals with a few employees and fluctuating income levels.
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SIMPLE IRA. Geared towards businesses with up to 100 employees.
Additional investment accounts
Apart from retirement-focused accounts, there are other investment options to diversify your financial portfolio.
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Taxable brokerage account. While lacking tax advantages, brokerage accounts have no contribution or withdrawal restrictions.
How to save for retirement without a 401(k): A roadmap
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Focus on your IRA. Whether you opt for a traditional or Roth IRA, prioritize maximizing your contributions up to the yearly limit.
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Explore self-employed retirement accounts. If eligible, research the best self-employed retirement account for your needs and consider both employer and employee contributions.
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Consider additional accounts. While an HSA is tied to a high-deductible health plan, anyone can open a taxable brokerage account to expand their stock market investments.
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