How to save for retirement if your job doesn’t offer a 401k

Saving for retirement is a crucial step to securing your long-term financial security, and the 401(k) is the traditional investment account available to more than half of all working-age Americans.

But according to the same census data crunched by Pew Charitable Trusts, more than a third of all Americans over the age of 22 (35%) don’t have access to a retirement account offered through their employer.

AARP estimates that around 55 million people don’t have access to a retirement program through their work.

“That’s a stunning figure and quite frankly somewhat disturbing because we know that if you actually have a retirement benefit at work, you’re 15 times more likely to save for retirement,” said Jean Setzfand, vice president of programs at AARP.

But you’re not out of luck just because your work doesn’t offer a retirement account like the 401(k). You can still save on your own with an individual retirement account — an IRA.

When it comes to saving with an IRA, you’ve got two main options. Both operate in largely the same way, with a few key distinctions.

Both allow you to save for retirement on your own, both have a maximum contribution limit of $5,500 for 2018 (or $6,500 if you’re over the age of 50), both require you to wait to withdraw money until you’re 59½ except in some circumstances — and neither are tethered to your job.  

Traditional IRA

The traditional IRA is a tax-deductible savings account. What that means is you can deduct the amount you contribute throughout the year from your taxes, lowering your overall tax burden in the year you contribute. That doesn’t mean it’s tax-free money, though; you’ll have to pay taxes on your withdrawals when you retire.

Traditional IRAs are not limited by your income; you can contribute to one whether you make $10,000 in a year or $10 million, but you will be forced to begin withdrawing your money when you reach 70½ years of age. This is known as the required minimum distribution.

Roth IRA

Roth IRAs are post-tax retirement accounts; you pay tax on it now. That means your money grows with the market tax-free, and you get to withdraw it with no additional taxes levied on the gains.

A Roth IRA has some income limits however; as you start to reach certain levels of income, your ability to contribute will start to be phased out.

“Those who are younger, I always think Roth IRA are more likely to be advantageous for you,” Setzfand said. “It just depends on when you think your taxes are going to be higher or lower.”

In other words, if you think your earning is on an upward trajectory, it makes more sense to pay the taxes now, when your tax rate is lower, than later when you’re a higher earner.