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How Everyone Can Save for Retirement When a 401K isn’t Offered at Work

Are you one of the millions of workers without a retirement plan at work? Or perhaps you’re self-employed and don’t have an employer at all? In either case, it’s imperative that you take your retirement savings and investments into your own hands.

Employer retirement accounts are great, but many businesses don’t take on the added expense of helping their employees prepare for the future. If you don’t get a 401K at work, you can use these strategies and accounts to save for retirement on your own.

Open your own self-directed IRA

The easiest retirement account to open and use for most legal US residents is an Individual Retirement Account (IRA). Even if you have a retirement account at work, most people can open an IRA or Roth IRA for additional retirement savings with a tax benefit.

Traditional IRA accounts allow you to save and invest for retirement with pre-tax dollars. That means you don’t pay income taxes on that portion of your income in the year you contribute. Instead, you’ll pay income taxes on withdrawals during retirement. Roth IRAs use after-tax dollars, which means you pay taxes when you contribute but qualified withdrawals are tax-free.

You can open an IRA at most investment brokerage firms. If you already have a brokerage account to invest in stocks, you can generally open an IRA at the same place and manage the account with one login. But not all IRA providers are the same, so it’s worth shopping around before going with a company for convenience.

The best IRA and Roth IRA accounts don’t have any recurring monthly fees and let you invest in stocks and ETFs with no commission. You can also find a managed portfolio, or robo-adviser, where your funds are invested in a professionally designed portfolio for a fee.

Roth IRA and traditional IRA accounts have a contribution limit of $6,000 for 2020 — add an extra $1,000 if you’re 50 or older. Income limits also apply, so six-figure earners should make sure they are eligible before making contributions.

Try a SEP or Solo 401K if you’re self-employed

If you’re self-employed or work as a contractor, you can use your business to open and fund an account for retirement. The two best accounts for this are generally a SEP IRA or a Solo 401K.

SEP is short for Simplified Employee Pension. SEP IRA accounts are great for solo self-employed workers. Companies with up to 100 employees are able to contribute to their employees’ retirement savings including their own. They are easy to set up and get started, sometimes completely online. For 2020, you can contribute the lower amount of $57,000 or 25% of your employee compensation.

Limits and rules around SEP accounts make Solo 401K plans more exciting for many self-employed workers. While they take a bit more paperwork to get started, they are much more flexible and typically have the same pricing and investment availability. However, many brokerages don’t support Solo 401K accounts.

This type of account has the same $57,000 annual limit as an SEP but is more flexible with how you contribute, including allowing after-tax Roth contributions. SEP accounts don’t allow catch-up contributions for those 50 and older.