personal finance

How to Save for Retirement If You Don't Have a 401(K) at Work

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Saving for retirement is an important part of a long-term financial plan, even if you don't get help with a 401(k) through work.

In 2020, some 33% of private industry workers didn't have access to an employer-sponsored retirement plan, according to data from the Bureau of Labor Statistics. Part-time workers, those in service industries and those who made the lowest wages were the least likely to have any kind of help saving for retirement from their employer.

Fortunately, there are ways to save for retirement outside of a traditional employer-sponsored 401(k) plan.

Roth and traditional IRAs

Often the first thing advisors recommend to those who don't have an employer-sponsored 401(k) is opening a Roth individual retirement account, where you'd set up your own contributions with after-tax dollars.

"I love the Roth IRA for young investors," said Tess Zigo, a certified financial planner at Emerge Wealth Strategies in Lisle, Illinois, adding that this is because young people are usually in a lower tax bracket early in their careers than they will be later.

Saving money in a Roth IRA means the funds will grow tax-free, meaning you don't have to pay anything to withdraw the money in retirement. People using a Roth IRA can also put away a nice chunk of money each year. In 2021, the total you can save in a Roth IRA is $6,000, or $7,000 if you're 50 or older.

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Of course, there are some limits. In 2021, your modified adjusted gross income must be less than $140,000 for single filers and $208,000 for those married filing jointly in order to qualify.

If you have taxable compensation, you could also save for retirement in a traditional IRA, which allows you to defer taxes, similar to a 401(k). This makes sense if you are in a higher tax bracket now than you will be later. In 2021, the contribution limit for a traditional IRA is $6,000 or $7,000 if you're 50 or older.

And, if you or a spouse don't have a 401(k) through work, some contributions you make to a traditional IRA are deductible, depending on other aspects of your finances.

One benefit to these accounts is that they may offer investors more freedom to decide how they're investing their money than a traditional 401(k) sponsored by an employer. In an IRA, investors generally can select their own stocks, bonds, mutual funds, exchange-traded funds and more, instead of picking from a limited number of options through their plan.

"You really have a complete open architecture in terms of what you can invest in with a Roth IRA," said Rob Greenman, a CFP and chief growth officer and partner at Vista Capital Partners in Portland, Oregon.

Of course, this could also be an issue for investors if they try to time the market, pick risky investments or don't have a well-balanced portfolio, he said, so caution is still warranted.

Regular brokerage accounts

If you don't want to open an IRA, you could also save for retirement in a traditional brokerage account, where you'd still be able to invest in markets to grow your money over time.

This option would give you the most freedom in terms of contributing and withdrawing, but would also mean you don't get the tax benefits you'd see in an IRA. If you trade often in a regular brokerage account, you could be hit with a big tax bill — something that won't happen if you use a Roth IRA.

 "The only thing that's better than compounding is tax-free compounding," said Greenman.

It makes sense to invest on your own if you can

Saving for retirement can feel like a daunting task, especially without the help of an employer-sponsored plan.

But it's worth it to start investing in a retirement account as soon as you can, even if it's just small amounts of money.

That's because compound interest over time will help that money grow by a lot more than if you saved it in a checking or savings account.

"You're getting interest on top of interest," Zigo said. "So not only are you getting interest on your money but you're also getting interest on the interest your money is earning."

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