Updated for the 2023 tax year.
When someone mentions “saving for retirement,” a 401(k) — the most common type of plan offered by employers to employees — is the first thing that comes to mind for many of us. It’s the gold-standard benefit we’re told to strive for when we enter the workforce. But believe it or not, more than one-third of working adults don’t get a 401(k) option at their job — think: freelancers, people in part-time roles, and workers whose employers just don’t offer them.
If you’re in the latter group, your employer might offer a different kind of retirement plan, like a payroll deduction IRA or a SIMPLE IRA. But if they don’t — if your company doesn’t offer any retirement savings option whatsoever — that doesn’t mean you’re out of luck. Here are some other types of accounts you can use to build up that nest egg for Future You — beyond what your company offers (or doesn’t).
Option 1: An IRA (individual retirement account)
Unlike 401(k)s, IRAs aren’t tied to your employer — they’re yours and yours alone. Anyone with earned income can set up an IRA and start investing for retirement — which is great, because they come with some sweet tax benefits.
There are two main IRA types — traditional and Roth — and you can use either or both (although income limits apply with a Roth). With a traditional IRA, you put (sometimes) tax-deductible money in today, then pay the taxes on whatever you withdraw when you retire. With a Roth, it’s the opposite. You put money in after paying taxes today, it can grow tax-free, and then you get to withdraw it tax-free, too. (Here’s a deeper explanation of the differences between a Roth and traditional IRA.)
The most you can put into an IRA for the 2023 tax year is $6,500, plus an extra $1,000 if you’re 50 or older. That’s the limit across both Roth and traditional accounts (meaning you can’t put $6,500 into each of them — it’s $6,500 total).
So that’s a great place to start. Even if you’re not maxing it out just yet, you can work your way up over time. Regardless, as you get closer to the age you want to retire, even investing the max on an IRA may not be enough to fund your entire retirement. Which brings us to …
Option 2: A taxable investment account
Once you’ve contributed enough to max out your IRA (high-five!), you can keep going with a “normal” taxable investment account, sometimes called a brokerage account. These accounts don’t come with the same special tax benefits as IRAs, but that doesn’t mean you can’t use them to invest for retirement.
They also don’t have contribution limits (another high-five!). So if there are no IRS constraints, how much should you contribute to your taxable account after you’ve maxed out your IRA?
The short answer: enough to get you on track for the retirement you’re dreaming of (assuming you want to retire — or at least dramatically downshift your professional life). To figure that out, of course, first you have to do the dreaming part. What does that ideal retirement look like (traditional or not)? Whether you want to move somewhere warm or just escape the rat race of a corporate career, you’ll need to evaluate your cost of living: your annual budgets, your extra expenses, etc. If you expect to or want to keep working part-time, how much income could that add? And so on. Once you figure out how much you’ll need each year, you can then add that up to find out how much you’ll need to aim to have saved total.
Ellevest’s online investing platform can help you figure that out and stay on track. We use details from your real life — like your salary, education, current savings, and, importantly, gender — to project how much we think you’ll be making per year right before you retire (including inflation). Then we calculate how much you’ll need in order to pay yourself 90% of that salary per year after you retire.
While other investing platforms might aim you lower than 90%, we take the conservative approach on purpose. That’s because women live longer, on average, so we need to save more — for a longer future. Plus, we’re guessing you probably want to have enough wiggle room for things like unexpected medical costs, which tend to happen much more frequently as you get older.
More options for freelancers / entrepreneurs
But where should you invest for retirement if you’re self-employed, or if you own a business? Is it the same? Good news if you’re the boss of you: You might have a few more choices.
You might consider, for example, a SEP IRA — which is basically a regular IRA, except the employer (in this case, you) makes all the contributions. You just have to:
be 21 years old and
earn at least $600 a year.
(One more stipulation for those with employees, btw: Once they’ve worked for you for three of the last five years, you also have to fund their SEP IRAs at the same rate you contribute to your own.)
The best part about SEP IRAs is that they have high contribution limits — up to 25% of earnings or $66,000 for the 2023 tax year, whichever is lower. (Pssst … you can open a SEP IRA with Ellevest.)
There’s also a solo 401(k), or “one-participant 401(k).” (A ~single-serve 401(k)~, if you will.) With this kind of account, pretend you’ve split yourself into two “people”: the employer and the employee. The employer side of you can contribute up to 25% of your compensation from the business, while the employee side of you can contribute up to $22,500 for the 2023 tax year, plus an additional $7,500 if you’re 50 or older). The total limit for tax year 2023 is still $66,000, but depending on your income, this weird split might actually let you contribute more with a solo 401(k) than a SEP IRA.
Where you invest will change over time
As you navigate the various accounts you’ll need to invest in your future, it’s good to keep in mind that your job / employer is likely to change multiple times over the course of your career. While your current employer might not offer a 401(k), your next one might; then, if you leave that job, you might roll that 401(k) into an IRA.* The important thing is that you know where your investments are and that you’re investing as consistently as you can.
So don’t let a lack of a 401(k) get you down. There are so many investing paths that can lead you toward the dream retirement you deserve. (In fact, we even have a flowchart that can help whittle things down for you, a free retirement-planning email course for Ellevest clients, and a whole workshop dedicated to making a plan you can get excited about.) Let Ellevest be there to guide you every step of the way.
Important considerations when deciding to roll over your 401(k) or 403(b):
Planning to work past the age of 72?
Once an individual reaches age 72 (previously 70 ½, for those born before June 30, 1949), the rules for both 401(k) / 403(b) plans and IRAs require the periodic withdrawal of certain minimum amounts, known as the required minimum distribution (RMD).
If you continue to work past the age of 72, however, your plan might not require you to make withdrawals from your 401(k) / 403(b) plan until you stop working. That means the funds in your plan can continue to grow tax-deferred until you retire. This is different from an IRA, where you’re required to start making withdrawals starting at age 72, whether you’re working or not.
Filing for bankruptcy?
If you are considering filing for bankruptcy, then funds you have held in a 401(k) or 403(b) plan are generally protected from creditors. Depending on your state of residency, funds in your IRA may not be fully protected from creditors. Please consult with your legal professional for additional guidance as to what may be applicable for your situation.
Fees and Expenses. Plans and IRAs usually generate investment-related expenses and plan or account fees. Plan fees include administrative fees, which may be paid by the employer. IRA account fees may include account set-up and custodial fees. In addition, advisers charge fees based upon assets under management. Investors should conduct an analysis to determine whether the IRA rollover account will generate higher or lower expenses.
Services. You should consider what services are offered under your existing retirement plan, such as investment advice, planning tools, telephone help lines, educational materials and workshops, or other services that would not be available outside of the plan.
Penalty-free withdrawal: You should evaluate withdrawal-related differences between IRAs and 401(k)s. For example, a 401(k) may offer a plan loan, a feature not offered by IRAs.
Protection from creditors and legal judgments: Generally, plan assets are fully protected under federal law. IRAs are usually protected in a bankruptcy filing. State laws vary as to whether IRAs are protected against lawsuits.
Required minimum distributions (“RMDs”): Your current retirement plan may permit participants to take RMDs later than age 72 if the individual is still working.
Employer stock: You should analyze whether there will be negative tax implications from rolling stock over to an IRA. Generally, stock appreciation when withdrawn from an IRA is taxable as ordinary income. Certain kinds of employer stock plans let investors liquidate shares and profits are taxed at the lower capital gains rates. You, however, must analyze whether the tax benefits are outweighed by the risk that arises when a client is overly concentrated in the employer’s stock.