You can save for retirement without a 401(k). Whether you're self-employed, are a stay-at-home-spouse, or work for a small business that doesn't offer a benefits package, you have alternative options to save for retirement without a 401(k).
Money Girl
180 How to Save for Retirement Without a 401(k)
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Workplace retirement plans, like 401Ks and 403Bs, are fantastic ways to save a retirement. But, what if you don't have access to one? Gail Carreyger recently made a post on the Money Girl Facebook page and said, "While I understand most of your listeners are probably regular employee types, do you think you could do some segments for those of us who are self-employed? We don't have the advantages of 401Ks and the like. What should we be doing differently to save a retirement?" Gail, thanks for the great question. This podcast is for you. I'll tell you what options you do have to save a retirement to ensure that you have a secure financial future. As Gail mentioned, many people don't have the option to invest in a retirement account at work. That might be the case if your between jobs are self-employed, work for a small business that doesn't offer benefits, or are a stay-at-home spouse, for instance. Well, don't let that stop you from reaching your retirement dreams. Thankfully, there are other types of accounts that you can use to achieve your long-term financial goals. No matter your situation, just about everyone can contribute to an IRA, or individual retirement arrangement. That's why I consider it the cornerstone of retirement savings. An IRA is a personal savings plan that has nothing to do with your work. You open it, fund it, and control it yourself. The only requirement to contribute to an IRA is that you have some amount of earned income, or have a spouse with earned income. The amount of money you can contribute to an IRA is based on your age and income. You can contribute an amount that matches your taxable compensation up to $5,000, or $6,000 if you're age 50 or older for 2010. For example, if you're 18 years old and make $4,000 from a part-time job this year, the maximum amount that you can contribute is $4,000, not $5,000. But even if you make half a million dollars, the most you can contribute is $5,000, or $6,000 if you're 50 or older. If you don't work but have a spouse that works, you can fund a spousal IRA using their income. As long as you're married and file a joint tax return, both you and your spouse can max out your IRAs every year, even with one income. The money you contribute to an IRA is allocated among the investments that you choose, like stocks, bonds, mutual funds, and exchange traded funds. If you're young, growth stock funds will allow your money to multiply as aggressively as possible over the years. On the other hand, if your retirement is less than 10 years away, choose more conservative and less risky investment options, like bond funds or money market funds. It's super easy to open up an IRA, just complete an application at an online brokerage, fund company, or bank. You can usually set one up to draft automatic contributions from your checking account for free. Here are some great places to get started. Etrade.com, scottrade.com, zeko.com, sharebuilder.com, schwab.com, vanguard.com, and bankofamerica.com. After you set up your IRA, if you're not sure what investments are right for you, don't be shy about contacting the company's financial services department and speaking with a representative or broker about your options. If you're self-employed or have your own company, there are even more ways to save our retirement in addition to an IRA. A self-employed person is someone who's in business for themselves, either full or part-time, and has an unincorporated business. We could try to explain what it's like to get your work done on a John Deere mower, compact tractor, or gator SUV. But to really understand the feeling, you just have to get in the seat. Learn more at jondere.com/getintheseat or visit a dealer near you. I love learning, and anything that makes learning easier. 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So make an impact on your child's learning, get Ixcel now, and money girl listeners can get an exclusive 20% off Ixcel membership when they sign up today at Ixcel.com/moneygirl. Visit Ixcel.com/moneygirl to get the most effective learning program out there at the best price. This episode is brought to you by AARP. Ten years from today, Lisa Schneider will trade in her office job to become the leader of a pack of dogs. As the owner of her own dog rescue, that is. A second act made possible by the reskilling courses Lisa's taking now with AARP to help make sure her income lives as long as she does. And she can finally run with the big dogs. And the small dogs who just think they're big dogs. That's why the younger you are, the more you need AARP. Learn more at aarp.org/skills. In this show, I'll discuss two of the best types of retirement plans to set up and maintain if you're self-employed or have a small company. The SEP and the Simple Plan. A SEP or Simplified Employee Pension Plan is also known as a SEP IRA. It allows employers to make pre-tax contributions to a traditional IRA for each of their eligible employees. SEPs don't allow employees to contribute. They can only be funded by employer contributions. But it allows individuals who are self-employed to make contributions to their own retirement account. If you're a one-man operation or have just a few employees, a SEP will be the easiest retirement plan for you to set up and maintain. You can even have a SEP for your self-employment income if you have another job where you participate in an employer's retirement plan. SEP rules allow you to contribute any amount you like, up to 25% of your salary if you're an employee of your own company, or up to 20% of your net self-employment income. These percentages are capped at a maximum contribution of $49,000 for 2010. If you employ workers, you must offer the SEP to all eligible employees and fund it in an amount that's equally proportional to their wages. To set one up, simply submit IRS Form 5305-SEP. The second retirement plan that I mentioned is the Simple, which stands for Savings Incentive Match Plan for Employees. It's available to the self-employed and to businesses with less than 100 employees. It can be set up as either an IRA or a 401(k), and is funded by both employer contributions and employee salary deferrals. For 2010, an employee can contribute up to $11,500, or up to $14,000 if they're at least 50 years old. An employer with a simple must-choose to make matching contributions of at least 3%, or to make non-elective contributions of 2% of each eligible employee's compensation. A simple is a great option when your company begins to grow and add employees. However, it may have more restrictions and entail more record-keeping than you really want if you're a sole proprietor. A simple also has restrictions on how much you can contribute if you also participate in a retirement plan at a different employer. See IRS Publication 560 for instructions on how to set up a simple plan. A quick and dirty tip is that if you're not self-employed and you don't qualify for an IRA, you can always invest for your retirement in a taxable brokerage account. Complete an online application at one of the websites that I mentioned earlier and start growing your retirement nest egg as soon as possible. If you're not subscribed to the podcast through iTunes, that's one of the most convenient ways to get each new show as soon as it's released. You can download it to your MP3 player or just listen from your computer. And if you enjoy the show, do me a favor and submit a review in iTunes. As always, you can email me at money@quickanddirtytips.com, send a tweet to @lauraattoms or make a post on the MoneyGirl Facebook page. You'll find links to everything I've mentioned in this podcast and more resources on the MoneyGirl blog at moneygirl.quickanddirtytips.com. I'm glad you're listening to Chain. That's all for now. Courtesy of MoneyGirl, your guide to a richer life. [music] Hey Denver, not ready to end that trip? Fly Southwest with no change or cancel fees. So, this sun-kissed couple can stay in vacay mode longer. Reality? Oh, that can wait. And this outdoorsy guy can get home early to catch that sunset hike. Plus an amazing view! While this hard worker can add one more out-of-office day. And I'm not checking my email. No change or cancel fees. That's a big flex. Only at Southwest. Fair difference may apply. Failure to cancel a reservation at least 10 minutes prior to schedule departure may result in forfeited flight credits. When you need meal time inspiration, it's worth shopping king supers. For thousands of appetizing ingredients that inspire countless mouth-watering meals. 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