That’s a lot of women, maybe more than 401. But I doubt if they’re all named Kay.
So you’re all set to begin saving your literal behind off – you’re on fire about FI/RE, or you’ve just gotten to the point where you know you need to start saving if you’re ever going to get ahead. Problem is, you have no 401k available to you through your employer. Most all advice says to max out your 401k in order to really jump-start your retirement savings, so what can you do to save if you have no 401k? For the purpose of this article, we’re referring to 401k plans in general. If your employer offers a 403b plan instead of a 401k, of course, that’s the best replacement. The same is true for 457 or Thrift Savings Plans (governmental), or SEP-IRAs or SIMPLE IRAs where offered.
Turns out there are several things you can do to save with no 401k. The 401k has only been around for 40 years (Actually 40 years this year: Happy Birthday, 401k!), and people have been saving for centuries without 401k plans. Plus, the good news is that even if you have a 401k available to you, many of the options listed below are also available to you, some more limited than others due to your participation in a 401k. But feel free to mix and match savings vehicles as allowed – the more ways to save, the better!
First, let’s take a look at why the 401k is such a popular option:
Most often, contributions to a 401k are matched to some extent by your employer. This results in an immediate return on your investment. If you contribute $1,000 to your 401k and your employer matches dollar-for-dollar within that range, your 401k balance will show $2,000. Like magic, you doubled your money!
For 2018, you’re allowed to defer up to $18,500, plus another $6,000 if you’re age 50 or older, into a 401k plan. For 2019 the limit is increased to $19,000 plus the $6,000 catch-up if over age 50.
Traditional 401k contributions are generally deferred from income tax. So you get a tax break on income that you were planning to save either way. As a result, your take-home pay doesn’t drop as much as you’ve contributed. For more detail on how this works, see the article How a 401(k) Contribution Affects Your Paycheck.
401k contributions are deducted directly from your paycheck, so the saving is automatic. This is in keeping with the rule to “pay yourself first”. If you had to make the decision about whether to contribute to your 401k each payday, you know there would be times when you’d skip a contribution. With direct deposit like this, you’re forced into the discipline of saving first. Sometimes we need that kind of discipline to keep on track.
Once contributed, your 401k money can be invested to grow, avoiding taxation until you are ready to take the money out of the account.
There are many more benefits to the 401k, but those are the most significant ones that serve the purposes of this article. Now let’s look at some alternatives.
IRA
If you have no 401k available from your employer and your spouse also does not have a 401k with an employer, you can open and fund a traditional IRA. The contribution limits are significantly less than the 401k limits listed above. Let’s run through the five benefits of 401k’s and compare them to an IRA:
There is no matching of your contribution to an IRA like there is with a 401k, so this big benefit is lost. However, there can be a tax credit available to you, depending on your income, called the Saver’s Credit. This tax credit can work a bit like the matching funds – although you won’t be able to add the amount of the credit to your IRA. You can, however, save the amount of the credit in one of the other options listed further below. Within the income limits, the Saver’s Credit can be applied to your 401k contributions if you have a 401k.
For 2018 you can contribute up to the lesser of your earned income for the year or $5,500, plus another $1,000 if you’re over age 50. For 2019 this figure is increased to $6,000 plus the $1,000 catch-up for over age 50. This is only about a third to a quarter of the amount you could set aside in a 401k. The excess money can be put to work in one of the other options below.
Traditional (non-Roth) IRA contributions are generally tax-deductible. This means that when you file your tax return and you’ve made contributions to your IRA (or will make them before April 15) you can reduce your gross income by the amount of the IRA contributions. This will have the effect of lowering your income and lowering your tax bill. Roth IRA contributions are not deductible from your income. See below for more information about deduction limitations.
Although your IRA contributions are not typically deducted directly from your paycheck, you can set up an automatic payment from your checking account to effectively do the same thing. Just go to your online banking application and set up a recurring payment to your IRA account, occurring on or about the same day as your paycheck each time. This way you can benefit from the forced discipline of automatic savings very similar to a 401k.
The IRA contributions can be invested for growth and will avoid taxation just the same as a 401k.
