Easy Ways to Save for Retirement Without a 401k

The first thing you can do if you don't have access to a 401k is to use an IRA instead. An IRA, or individual retirement account, is similar to a 401k in that it is designed to help you save for retirement. IRAs differ from 401k plans in that 401(k)s are only offered by employers, whereas IRAs are held outside of work.

If you are not able to use a 401k, an IRA is a solid option to use. There are two main types of IRAs that you can choose from. First, is the Traditional IRA. The Traditional IRA functions almost like a 401k plan outside of work.

When you contribute to a Traditional IRA, you contribute using after tax dollars. However, these contributions may be tax deductible depending on your income (usually having a 401k will also impact whether or not you can deduct contributions to a Traditional IRA but that does not apply here.)

After making contributions, your money grows tax deferred just like a 401k. This means you do not pay taxes on any of the growth of the account or income received from investments within the account. However, since you deferred taxes, you will have to pay taxes in retirement.

In general, anyone can open a Traditional IRA as long as they have earned income. The second type of IRA is the Roth IRA. In order to use a Roth IRA, your income has to fall within certain thresholds. The Roth IRA works in the opposite way of a Traditional IRA. When you contribute to a Roth IRA, you use after tax dollars.

However, once the dollars are in the account, all of the money grows tax free and you won't have to pay any taxes on any of the money that you pull out in retirement. Like a 401k, there are rules that you have to follow if you want to save for retirement through an IRA.

You can only contribute a maximum of $7,000 per year or $8,000 per year if you are 50 or older to an IRA in 2024. Additionally, you usually can't access the money in an IRA until you are 59 and a half years old unless you want to pay income taxes and a 10% penalty on your withdrawal.

The exception to this is that you can withdraw the base contributions from a Roth IRA.  It is important to note that like a 401k, IRAs are not investments in and of themselves. They simply hold your investments and provide special provisions on how your investments will be treated.

If you decide to open an IRA through a broker, you need to go through the process of placing investments within the account. This might include assets like index and mutual funds. If you don't do this step, using an IRA will not help you build wealth for your retirement.

Your second option if you don't have a 401k is to use a brokerage account. Like an IRA, a brokerage account is not an investment itself. It simply holds your investments. It is also worth noting that you should probably fund an IRA up to the limit before using a brokerage account.

The reason for this is that brokerage accounts do not offer a tax deferred or tax free benefit like IRAs do as you invest. Instead, the investments within brokerage accounts are taxed at either a short or long term capital gains rate when you sell the investments.

A capital gain is simply an increase in the value of a capital asset. For example, say that you bought a stock for $20 and then it went up in value to $40. You would have a capital gain, or increase in value of $20. Short term capital gains tax is applied to the profits from the sale of an asset that you held for a year or less.

Short term capital gains rates are equivalent to your ordinary income tax rates. For example, say you bought a stock for $100 in a brokerage account. You held onto the stock for less then a year before selling for $200, which would leave you with a $100 profit.

This $100 is subject to a short term capital gains tax. Since short term capital gains rates are equivalent to your income tax rates, you would owe $25 in short term capital gains tax if your income tax rate was 25%. Long term capital gains tax is applied to the profits from the sale of an asset that you held for a year or longer.

Long term capital gains rates are 0%, 15% or 20% depending on your tax filing status and income. Although brokerage accounts do not offer any special tax benefits, they still can be a viable option to help you save for retirement - especially if you do not have a 401k.

The reason for this is that brokerage accounts do not have any contribution limits. This means that you can put as much money in the account as you want. IRAs do offer tax benefits, but you can only contribute $7,000 or $8,000 per year if you are 50 or older to the account in 2024.

If you add in a brokerage account in addition to an IRA, you can contribute enough money to reach your retirement savings goals. For example, say that you make $100,000 per year and decide to invest at least 15% of your income for retirement.

If you max out an IRA at $7,000 a brokerage account will allow you to invest the remaining $8,000 so you can have a well funded retirement. Keep in mind that you do not have to send all $8,000 to a brokerage account. You can break that $8,000 up and send part of it to a brokerage account and part of it to other accounts or investments depending on your circumstances and goals.  

Contrary to what the real estate gurus on TikTok say about real estate, investing in real estate is not always the easiest endeavor. However, if you don't have a 401k, it can be a viable option if you know what you are doing.

Before investing in real estate, it is probably better to start with an IRA if you are an everyday investor as an IRA is much easier to invest in than real estate. However, once you have done that, you can take the funds that would have gone to a 401k or brokerage account and buy real estate with them.

Specifically, we are talking about real estate rental properties and not your primary residence. For example, say that you have $20,000 to invest per year. After you have sent $7,000 to your IRA, you might save the remaining $13,000 for several years and use that money to buy a small rental property.

The benefits of rental properties can include the appreciation of the property, the fact that your tenant is paying down your mortgage, monthly cash flow, and potential tax benefits. Keep in mind that you need to be in a solid place financially before investing in real estate.

Make sure you have a well funded emergency fund, strong insurance coverage, and are managing true debt. Also keep in mind that simply because real estate exists as an alternative way to save for retirement if you don't have a 401k, does not mean you have to do it yourself.

Ask yourself if you want to be responsible to evict tenants, fix a toilet at 2 am, and raise rent? Before jumping into real estate, it is a good idea to consult a real estate professional to see if real estate would be a viable replacement for a 401k.  

Beyond the three options above, you can also use a few other financial products in lieu of a 401k. The first set of products you could use would be banking products. This might include a high yield savings account, CDs, and money market accounts.

Keep in mind that these banking products won't provide as high of a return as investing in something riskier like the stock market. If you still have a ways to go until you retire, say 20 or 30 years, it is best to avoid using bank products to fund your retirement as you need to be focusing on capital appreciation at this stage.

However, if you are close to your retirement, you may be focusing on preserving capital so banking products may be appropriate depending on your individual circumstances. The second set of products you could use if you don't have a 401k are insurance products.

Specifically, annuities and life insurance. An annuity is an insurance product that provides a steady stream of income in retirement. When yuo buy an annuity, you give an insurance company a lump sum of money or pay for the annuity with periodic payments.

In exchange, the insurance company will provide you with payments each month, sometimes for the rest of your life. If you are looking for a financial product that can provide stability in retirement due to predictable payments, an annuity can be a good option depending how it is set up.

The second type of insurance product you could consider using in lieu of a 401k would be a permanent life insurance policy. Life insurance as an investment? We know it sounds weird, but stick with us. All life insurance policies offer a death benefit that will pay out if or when you die depending on the policy.

However, certain life insurance policies, such as whole life insurance, build what is called cash value. If you were to buy a permanent life insurance policy, part of your money will go towards your premium, part towards administrative costs, and part towards cash value.  

This cash value is a separate account attached to your life insurance policy that grows over time. You can withdraw the funds from the account, borrow against the account, use the cash value to pay for your cost of insurance, and surrender the policy and take the cash out.

Keep in mind that you should not view whole life insurance as an investment. However, if you integrate with other tools it can be a powerful asset in retirement. It will give you access to cash when you need it, and the cash value portion of a whole life insurance policy does not go down in value.  

One of the reasons that you may be on this page is that you have recently lost access to a 401k plan and are wondering what to do for retirement. This typically happens when you leave a job that did offer a 401k plan for a job that does not offer a 401k plan.

If this is your situation, there are a few things that you can do if you lose access to your 401k plan. The first thing is to leave your 401k plan with your old employer if allowed. You won't be able to contribute any more to the account, but the investments that you selected within the account will grow over time.

The second, and much better option is to do a 401k Rollover. A 401k Rollover is where you rollover funds from your old 401k that you no longer have access to and put those funds into an IRA whether that be a Roth or Traditional IRA.

If you rollover a 401k into a Traditional IRA there are usually not any taxes applied as both accounts are tax deferred. If you rollover a 401k into a Roth IRA taxes are assessed as you are rolling funds from a tax deferred account to a tax free account.  

If you lose access to your 401k, a Rollover 401k into an IRA will allow you to keep investing. Granted the contribution limits of an IRA are lower than a 401k, but it is better to have a tax advantaged account that you can use for retirement as opposed to not having one.

Keep in mind that just because you do not currently have access to a 401k, does not mean you never will. You might currently work for an employer that does not offer a 401k plan. Your employer may offer a 401k plan later down the line or you may switch jobs to a company that does offer a 401k plan.

The good news is that you can start saving for your retirement with some of the options listed above. If you do not have a 401k right now, but get access to one later down the line, you can adjust your investments and accounts accordingly if you decide to participate in a 401k plan.  

The bottom line is that you do not need a 401k to have a successful retirement. There are many options available to use instead such as IRAs, brokerage accounts, real estate, and other investment opportunities such as banking and insurance products.

Do not panic if your employer does not currently offer a 401k or if you recently lost your 401k. You can roll funds over from an old 401k, and you can build a strong retirement with alternative retirement accounts that are offered outside of a 401k.