It's possible to retire comfortably if you don't have a 401(k) plan but it's hard to beat this type of plan if you're saving for retirement. The high contribution limits and employer match can really boost your savings. About one-third of U.S. private workers don't have access to work-based plans, and many employers don't offer a match, but these individuals have other options.
Key Takeaways
- Begin saving as early as possible in other tax-advantaged accounts if you don't have a 401(k).
- Good alternatives include traditional and Roth IRAs and health savings accounts (HSAs).
- A non-retirement investment account can offer higher earnings but your risk may be higher.
- Investment accounts don't typically come with the same tax advantages as retirement accounts.
Individual Retirement Accounts (IRAs)
An individual retirement account (IRA) is a tax-advantaged savings vehicle that holds investments you can choose. There are two main types of IRAs: traditional and Roth. The biggest difference between them is when you pay taxes on your contributions and the account's earnings.
Traditional IRAs
You get an upfront tax break with a traditional IRA. You can deduct the money you contribute from your income when you file your annual tax return. The money in the account then grows tax-free. But your contributions are taxed as ordinary income when you begin taking money out during retirement.
Roth IRAs
A Roth IRA doesn't provide an upfront tax break but qualified withdrawals are tax-free. These are withdrawals taken after you reach age 59½ from accounts that have been established for at least five years. This can be a huge advantage if you expect to be in a higher tax bracket during retirement.
IRA Contribution Limits
The biggest drawback to saving in a traditional or Roth IRA is the low contribution limit. You can't contribute at all to a Roth if you earn too much money.
Annual contribution limits are the same for traditional and Roth IRAs if you meet the income limits. You can contribute up to $6,500 for the 2023 tax year or up to $7,500 if you've reached age 50. You have until the tax filing deadline in April 2024 to make contributions for 2023.
These limits increase to $7,000 and $8,000 respectively in the 2024 tax year.
Health Savings Accounts (HSAs)
A Health Savings Account (HSA) can be an undercover way to boost your retirement savings. HSAs are intended to pay for health care expenses but they can be a valuable source of income when you retire as well.
Your HSA contributions are tax deductible. They lower your tax bill in the year you make them. And withdrawals are tax-free if you use the money to pay for health care expenses, including dental and vision care.
HSA Contribution Limits
The maximum HSA contribution limits in tax year 2024 are:
- $4,150 for individuals
- $8,300 for family coverage
These limits are up from $3,850 and $7,750 respectively in 2023.
Unlike flexible savings accounts (FSAs), HSAs don't have a use-it-or-lose-it provision. Money in the account at the end of the year can stay in the account indefinitely. You could end up with a tidy sum in retirement if you make the maximum contribution each year, assuming you stay healthy.
HSA Withdrawals in Retirement
You can always withdraw money from your HSA tax-free and penalty-free for qualified medical expenses. You can withdraw HSA money for things other than health care without incurring a tax penalty in retirement. You can use HSA funds for any reason after you reach age 65 but you'll pay ordinary income tax on the distributions.
Taxable Investment Accounts
A taxable investment account, such as a non-retirement account or brokerage account, is another option to consider if you max out an IRA and/or an HSA. These accounts don’t offer any tax advantages such as deductible contributions or tax-free growth but you have a shot at earning better returns than you would holding your extra cash in a regular savings account.
Investments with higher potential returns also have higher risks so think about your risk profile and your time horizon when you're deciding how much risk you're willing to take.
You can invest as little or as much as you like in a taxable account and put your money into stocks, bonds, mutual funds, exchange-traded funds (ETFs), and/or real estate investment trusts (REITs). Just remember that earnings from these investments are subject to capital gains taxes. Be sure to plan for how this could affect your spending power in retirement.
Tax-Deferred Annuities
Annuities offer another way to reach your retirement savings goal. They're offered through insurance companies and they provide tax deferral coupled with varied investment opportunities. Annuities are available with:
- Fixed interest rates
- Indexed interest rates based on the performance of a specific index, or
- Variable rates that are tied to the performance of the underlying investments
The money you stash in an annuity grows tax-deferred but it becomes taxable when you withdraw it in retirement. Annuities can provide a guaranteed income stream for a certain number of years or a lifetime.
Real Estate Investments
Another way to save for retirement is through real estate investments. You may already have access to the real estate sector through a mutual fund, ETF, or REIT if you have an IRA or a brokerage account.
You can also buy real estate outright to generate an income stream during your retirement years. You can live in one section and rent out the other if you invest in a multi-family home. This effectively reduces your total living expenses while you're paying down the mortgage.
You can later decide to continue to rent out the property and receive a steady income from rent or you can sell the home and use the proceeds for living expenses or other investments. Ideally, the property will have appreciated.
Invest in a Small Business
Another option to help you reach your retirement goals is to invest in a small business. This doesn't necessarily mean becoming a business owner. You can invest in an established company as a silent partner if you don't want to drive the ship.
Small business profits aren't capped and the potential return on investment (ROI) is higher than other alternatives whether you choose entrepreneurship or investing. Of course, these investments come with a great deal of risk. There's no guarantee that the time or money you invest in a small business will generate a substantial return over time.
How Much Can I Put in a Roth IRA?
The contribution limit for traditional and Roth IRAs is $6,500 for 2023 with a catch-up contribution of $1,000 for those who have reached age 50, putting the total at $7,500. The limit increases to $7.000 plus the catch-up contribution in 2024.
What Can an HSA Be Used for?
Health savings accounts (HSAs) can be used for various health care, dental, and vision expenses. These expenses can be for you, your spouse, or your eligible dependents. You can withdraw money from an HSA without a penalty in retirement.
Can You Use Retirement Funds to Buy Real Estate?
You can use tax-advantaged accounts such as a self-directed IRA to invest in real estate. The property must be for investment purposes. You’re not allowed to use it personally.
The Bottom Line
A 401(k) can be an extremely powerful tool to fuel your retirement savings efforts but not having one doesn't mean that you have to retire broke. You can take advantage of other savings and investment plans to enjoy the kind of retirement you want.
Start saving as soon as possible and be sure you understand the rules for how much you can save and how your contributions will be taxed so you're not hit with any surprises in retirement.
