3 Ways to Save for Retirement Without a 401(k)

There are multiple retirement options available other than a 401(k). (Image: QuinceCreative via Pixabay)

In the U.S., a 401(k) account is the most popular way for people to save for retirement. Employers match your contributions and you also get tax benefits with the account. However, not every American citizen has a retirement account, with estimates suggesting that only about half of the working class population actually have a 401(k). But this is not necessarily bad news since there are other ways to save for retirement.

3 Ways to save for retirement

1. IRA

An Individual Retirement Account (IRA) is a retirement savings account that also gives similar tax benefits like the 401(k). As of 2019, individuals can contribute up to US$6,000 per annum into the account.

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“Contributions to traditional IRAs are generally made with pre-tax income. You don’t pay tax on that money until you withdraw it at 59½ or older, but if you do decide you need to withdraw it before that age, you pay both income tax on your withdrawal and a 10 percent penalty,” according to Investopedia.

However, the withdrawal penalty may not be applied in cases where your contributions were not deducted from your taxable income. Once you cross 70½ years of age, you won’t be able to contribute to the IRA and will be expected to make withdrawals.

Roth IRAs are similar to traditional IRAs in many ways. The difference is that you will be able to make tax-free withdrawals from Roth IRAs once you are retired. Regular contributions to IRA accounts can easily help any person accumulate enough wealth for their retirement.

For instance, if someone were to contribute US$5,500 every year from the age of 25 to the age of 65 into a Roth IRA account that generates an annual return of about 7 percent, they would end up with US$1 million by the time they stopped contributions.

For self-employed individuals, a Simplified Employee Pension IRA will be more suitable. Unlike other IRAs, you can contribute a lot more money into SEP IRAs. In 2019, annual contributions of up to US$56,000 were allowed in SEP IRAs. Taxes are only applicable to withdrawals.

2. Taxable investment account

A taxable investment account does not offer any tax advantages like an IRA. However, it does provide a chance to earn better returns from your investment when compared to a regular savings account. You have the right to invest as much as you want in the taxable investment account in instruments, like stocks, ETFs, bonds, mutual funds, and more. Earnings from such investments will be subjected to capital gains tax

3. Health Savings Account (HSA)

A good portion of wealth in old age goes into maintaining one’s health. As such, it is definitely a good idea to open an HSA that allows you to put pre-tax money to use for medical expenses whenever you want. You will need a High-Deductible Healthcare Plan (HDHP) for opening an HSA.

Contributions to the account are limited to US$3,500 per annum for singles and US$7,000 per annum for people with families. Those who are over 55 years of age can contribute US$1,000 extra. An HSA is ideal only for people who are generally healthy and want to protect themselves from some sudden, expensive health issues.

People who suffer from chronic illnesses and those on regular medications are better off avoiding HSA, as the program will turn out to be expensive. After the age of 65, you can withdraw money from the account for non-medical reasons. You only have to pay the regular income tax on such withdrawals. 

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