“Steps to Maximize Your 401k.” “How to Master Your 401k.” “Ways to Increase Your 401k.” Headlines such as these are common in personal finance publications, and tend to give the impression that a 401k account is the way to save for retirement. For most employees, it is.
About 80 percent of full-time workers have access to employer-sponsored retirement plans — the majority of which are 401k’s, according to the American Benefits Council. But if you’re not a full-time employee and don’t have access to a 401k or similar workplace plan, you might be wondering how you’re supposed to save for retirement.
As a self-employed writer, I haven’t had access to a workplace retirement plan for 15 years — but that hasn’t stopped me from saving. In fact, there are several ways to build a nest egg if you work part-time and don’t have access to a retirement plan at work, are self-employed or have your own business.
“It seems sometimes daunting to think about having to open up your own retirement account and navigate the many investment options, rather than just plug into the company sponsored 401k plan or pension plan if you are employed for a company,” said Michael Hardy, a certified financial planner with Mollot & Hardy in Amherst, N.Y. But, in fact, it’s simple to set up any of the plans that are available if you’re saving on your own, he said.
Here are five ways you can save for retirement if you’re not a full-time employee and don’t have access to a workplace retirement plan. “I would recommend that anyone who is self-employed use one of these plans or a combination of these plans,” said Josh Alpert, owner of Motor City Retirement Advising in Royal Oak, Mich.
1. Save in a Traditional IRA
As the name suggests, an Individual Retirement Arrangement — or IRA — gives people a way to save for retirement on their own. Although it’s not geared specifically to the self-employed, since employees can open one of these accounts, too, a traditional IRA is an easy way build a nest egg — especially if you can’t afford to set aside a large amount every year.
If you have earned income, you can contribute up to $5,500 to an IRA in 2016 — or $6,500 if you’re 50 or older. You can open an account with a bank or financial institution, investment firm or even a life insurance company, and can invest in a variety of securities such as stocks, bonds, mutual funds, exchange-traded funds, annuities and certificates of deposit.
There are some nice tax benefits of a traditional IRA, too. You can deduct the full amount of your contribution on your federal tax return as long as neither you nor your spouse is covered by a retirement plan at work and your modified adjusted gross income is $183,000 or less. Plus, you don’t have to pay any taxes on the earnings on your IRA investments until you withdraw the money in retirement.
2. Save in a Roth IRA
The contribution limits for a Roth IRA are the same as a traditional IRA, and you have the same wide array of investment options. But there are some key differences between a Roth and traditional IRA.
Although you must have earned income to contribute to a Roth, you can’t have too much. Your modified adjusted gross income must be less than $117,000 if you’re single, or $184,000 if you’re married filing jointly, to contribute the maximum $5,500 — or $6,500 if you’re 50 or older — in 2016. The amount you can contribute is reduced if you make between $117,000 and $132,000 if you’re single and $184,000 and $194,000 if you’re married filing jointly. Once your income tops the higher end of those limits, you can’t contribute to a Roth.
The other big difference is that you can’t deduct Roth contributions. However, you don’t have to pay any taxes when you withdraw money from a Roth as long as you’re 59½ or older and have had the account for five years. So a Roth can be a great source of tax-free income in retirement.
Alpert said Roth IRAs are a great way for younger adults to save because they have the benefit of time. Even though the Roth contribution limit is relatively low, the money can grow significantly thanks to compounding interest if you start saving at a young age. And you’ll likely be in a higher tax bracket by the time you reach retirement than when you started contributing — which makes tax-free Roth withdrawals especially appealing.
But if you want to have enough saved for a comfortable retirement, you’ll likely need to open another type of account. “Ultimately, the contribution limits on a Roth make it difficult to rely solely on one,” Alpert said.