How to save for retirement without a 401(k)

Five options for small-business owners, sole practitioners or anyone whose company doesn’t have a retirement plan

Most people are familiar with 401(k)s, the tax-deferred retirement plans offered by many employers. But if your company doesn’t offer a retirement plan or you’re self-employed, don’t let that stop you. You have several other ways to save for retirement — and get tax advantages along the way.

It’s typically best not to put your retirement nest egg in a savings account along with your emergency fund. Bank accounts pay low interest rates that likely won’t keep up with inflation. Instead, consider keeping your retirement savings invested in a diverse mix of assets with long-term growth potential. Here are five options to consider:

Traditional IRA

A traditional individual retirement account, or IRA, lets you set aside money every year tax-free. You can usually deduct it from your income on your tax return, so it’s like you never earned it. Then, you can invest that money in a range of products that will allow it to grow tax deferred until you retire. The withdrawals you can begin taking at age 59½ (and must begin to take at age 72) are then taxed as income.

In 2022, you’re allowed to contribute up to $6,000 a year to a traditional IRA or $7,000 a year if you are 50 or older.

Note: Your tax deduction may be limited if you (or your spouse if you are married) are covered by a retirement plan at work and your income exceeds certain levels.

Roth IRA

A Roth IRA has the same annual contribution limits ($6,000 a year or $7,000 a year if you are 50 or older) and basic rules as a traditional IRA, but your upfront contributions are not deductible. In other words, you pay taxes on that income before you contribute it to your Roth IRA. The money then grows tax-free until you retire, when it can be withdrawn tax-free.

Note: Roth IRA contributions are always subject to income limits that vary depending on marital and tax-filing status.

SIMPLE IRAs and SEP-IRAs

SIMPLE IRAs and SEP-IRAs are designed for small businesses and sole proprietors. They are similar to traditional IRAs but have larger contribution limits.

A Savings Incentive Match Plan for Employees IRA (SIMPLE IRA) allows both a business owner and their employees to contribute up to $14,000 a year or $17,000 for those age 50 or older. The business owner must either contribute 2% of each employee’s salary every year or match up to 3% of employee contributions.

A Simplified Employee Pension IRA (SEP-IRA) is funded solely by a business owner. The annual limit is 25% of the business owner’s salary up to $61,000, and there is no requirement to fund the account every year. A SEP-IRA is a good option for very small businesses and self-employed people since contributions can be adjusted based on cash flow.

Solo 401(k) plans

A solo 401(k) plan is like a SEP-IRA, but it’s only available for self-employed individuals with no employees. The contribution limit is the same as a regular 401(k), with a catch-up contribution of $6,500 (in 2022) allowed for those age 50 and older. You can choose a traditional plan with pretax contributions or a Roth version with after-tax contributions.

Consider talking to a financial professional to help determine which option may be best for you. And remember, whichever plan you choose, it’s a good idea to start early and contribute as much as you can so your savings can potentially grow. You’ll thank yourself when it comes time to retire.