If you work for an employer, you may have access to a 401(k) plan
. With this type of account, the money you contribute is often automatically withheld from your paychecks before you ever get a chance to spend it. You immediately get a tax break on your traditional 401(k) contributions, and your employer may contribute additional money to the account. Some workers are even enrolled in the plan without having to fill out any paperwork.
But not everyone has access to a traditional 401(k) through a company and, in today’s gig economy, it’s not uncommon to receive income from several sources. Saving for retirement without an employee-sponsored 401(k) plan is possible although it takes a little more effort.
Those who are willing to take the initiative can still qualify for many of the tax breaks and investment gains that workers with 401(k) plans enjoy. You can manage your own retirement accounts and watch your funds grow over time or work with a financial professional to oversee them. Either way, you’ll have a chance to plan for retirement on your own terms.
Consider these ways to save for retirement without a 401(k):
— Fund an IRA.
— Open a Roth IRA.
— Set up direct deposit.
— Save your tax refund.
— Claim the saver’s tax credit.
— Use a taxable investment account.
— Get a health savings account.
— Contribute to a savings account or CD.
Fund an IRA
You can defer paying income tax on up to $7,000 that you contribute to an IRA, and investors age 50 and older can save as much as $8,000 in an IRA.
Couples can contribute $7,000 to an IRA in each of their names, even if only one spouse works, for a total of $14,000 in tax-deferred savings. And if both spouses are age 50 or older, they can shield as much as $16,000 from income tax in a traditional IRA in 2024. Income tax won’t be due until you withdraw the money from the account.
Within an IRA, you’ll be able to choose how to invest your funds. You can also allocate your savings to a mix of stocks, bonds and mutual funds.
Open a Roth IRA
Roth IRAs have the same contribution limits as traditional IRAs but are taxed differently. You contribute after-tax dollars to Roth IRAs, and then you can withdraw the money, including investment earnings, tax-free in retirement.
To qualify for tax-free distributions, you must be age 59 1/2 or older, and the account must be at least five years old. You can contribute to a traditional and Roth IRA as long as your deposits to both accounts don’t exceed the annual contribution limits.
[Read: How to Open a Roth IRA.]
Set Up Direct Deposit
One of the major perks of 401(k) plans is that the deposits are withheld from your paychecks, which prevents you from spending the money or having to take action to save. You can replicate this by setting up a direct deposit from your paycheck to an IRA or other investment account.
You can max out an IRA by contributing $583 per month or $291 per semimonthly paycheck. If you’re 50 or older, you must contribute $666 monthly or $333 semimonthly to get the maximum tax perks.
[How to Start Investing and Saving for Retirement With Little Money]
Save Your Tax Refund
Another way to fund an IRA is to use part of your tax refund. IRS Form 8888 allows you to directly deposit your tax refund in up to three different savings or investment accounts, including an IRA.
Claim the Saver’s Credit
Contributing to a traditional or Roth IRA could qualify you for the saver’s credit. This tax credit is worth between 10% and 50% of the amount contributed, up to $2,000 for individuals and $4,000 for couples, with the largest credits going to people with the lowest incomes.
Retirement savers with adjusted gross incomes below $36,500 for singles, $54,750 for heads of household and $73,000 for married couples are eligible for the saver’s credit in 2024.
[READ: How to Qualify for the Retirement Saver’s Match]
Use a Taxable Investment Account
If you can save more after maxing out an IRA, you can contribute to a taxable investment account. While you won’t be able to defer taxes on this account, you can minimize them by putting highly taxed investments in your retirement account and holding investments taxed at a lower rate in your taxable accounts.
When you sell investments from the account, they could be subject to long-term capital gains tax.
Get a Health Savings Account
Designed for medical expenses, health savings accounts can help you prepare for health costs in retirement. The contributions could be tax-deductible, and the growth is tax-free. If you make withdrawals to use for qualified medical expenses, they won’t be subject to taxes.
In 2024, as an individual you can contribute up to $4,150 in a health savings account. Families can put in up to $8,300.
Contribute to a Savings Account or CD
Everyone needs some liquid cash in a savings account, certificate of deposit or other Federal Deposit Insurance Corp.-insured account to cover repairs, emergencies or other unexpected costs.
Depending on the account, you may be able to withdraw your money at any time without penalties or significant tax consequences. While interest rates are typically low compared to higher-risk investment returns, these accounts are insured by the federal government and never lose value, so the savings will be there when you need them.
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5 Ways to Minimize Taxes on Retirement Income
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Ways to Save for Retirement Without a 401(k) originally appeared on usnews.com
Update 03/19/24: This story was published at an earlier date and has been updated with new information.
