No retirement plan with the job? Here’s how to save cash anyway
One of the biggest obstacles to saving for retirement is when your employer doesn’t offer a 401(k) or you work for yourself.
If you’re self-employed or work for a company that doesn’t offer a retirement plan, you will need to put in some extra effort to save for retirement.
On the plus side, you have several tax-advantaged options from which to choose.
IRA: If you work for an employer that doesn’t offer a retirement plan, you can take a deduction on your tax return for contributions to a traditional IRA, no matter how much money you make.
In 2024, you can deduct up to $7,000, plus $1,000 in catch-up contributions if you’re 50 or older. If your spouse is covered by a workplace plan but you are not, you can deduct the maximum contribution if your modified adjusted gross income is less than $230,000. If your MAGI is between $230,000 and $240,000, you can claim a partial deduction.
Another option is a Roth IRA. In 2024, you can contribute up to $7,000 ($8,000 if you’re 50 or older) to a Roth as long as your modified adjusted gross income is $146,000 or less, or $230,000 or less for married couples who file jointly. (Note that the $7,000 or $8,000 maximum contribution is the total combined amount you can allocate among both traditional and Roth IRAs.)
You won’t get the upfront tax break with a Roth, but withdrawals will be tax-free when you retire, and you won’t have to take required minimum distributions. You can withdraw contributions at any time without paying taxes or penalties. (Early withdrawals of investment earnings may be subject to a penalty and tax.)
Solo 401(k): This option is worth considering if you’re self-employed or your business’s only other employee is your spouse.
The contribution structure has two parts: As an employee, you can make elective deferrals of up to $23,000 in 2024, with catch-up contributions of up to $7,500 if you’re 50 or older. And as an employer, you can contribute up to 20% of your net self-employment income, for a combined total of up to $76,500. Contributions to a traditional solo 401(k) are tax-deferred; some providers offer a Roth option.
In 2024, self-employed workers can contribute the lesser of 20% of net income or $69,000 to a SEP IRA. SEP IRAs generally have fewer administrative requirements than solo 401(k) plans, and if you expect to hire employees (other than your spouse), a SEP IRA is probably the better choice. Keep in mind, though, that you’ll be required to contribute an equal percentage of salary for all eligible employees.
In the past, you could make only pretax contributions to a SEP IRA, but legislation enacted in late 2022 allows SEP IRA providers to offer a Roth option. However, although the provision became effective in 2023, it may be a while before providers make the administrative changes necessary to offer a Roth SEP IRA.