No 401(k)? No Problem

Saving for retirement can be daunting, so it’s no surprise that employer-sponsored retirement plans can be a key stepping-stone into the world of investing—and to a healthy retirement nest egg. If you’re self-employed or without access to a plan at work, you might find it intimidating to figure out where to begin saving for the future, but setting up a retirement plan for yourself can be simple. 

Here’s an introduction to some of your options. As you review them, keep in mind that there are fees and costs associated with all investment products and services, including retirement plans. Talk to a tax specialist or investment professional about your specific situation and goals. 

Traditional or Roth IRA

Regardless of where you work—whether you’re self-employed, have a side hustle, or even if your employer offers a retirement plan—you can save through individual retirement accounts, or IRAs. IRAs allow you to make tax-advantaged contributions to save for retirement. You can set up an IRA through a financial services company, such as a bank, brokerage firm or insurance company and can often do so online.

The two primary types of IRAs are the traditional IRA and the Roth IRA. Furthermore, you can decide whether to invest in the choices made available by the plan custodian (generally stocks, bonds and mutual funds), or choose a self-directed plan offered by a custodian that allows investment in a broader set of assets.

SEP IRAs and SIMPLE IRAs

There are two other IRA options: Simplified Employee Pension (SEP) IRAs and Savings Incentive Match Plan for Employers (SIMPLE) IRAs. Both follow the same rules as traditional IRAs but feature higher contribution limits. And both allow for traditional and self-directed investment options.

SEP IRAs can be a good choice for the self-employed: You can contribute up to an annual cap or an IRS-determined percent of your self-employment net earnings, whichever is lower. SEP IRAs are not just for the self-employed. Any employer can start one using an IRS prototype with no start-up or operating costs.

You might run into a SIMPLE IRA if you work for a small company or startup. This type of plan lets employees and employers contribute to a traditional IRA the company has set up. Plans can be easily established using an IRS template. Employers can either match employee contributions or make a contribution to all eligible employees, based percentages set by the IRS.

Contributions can now be made pre-tax and post-tax for both SEP and SIMPLE IRAs. However, there are other differences between the two types of plans. For example, if you take money out of a SIMPLE IRA within the first two years of participation, you’ll incur a 25 percent tax penalty. Consult a tax specialist for details about the different characteristics of SEP and SIMPLE IRAs.

The Solo 401(k)

Solo 401(k)s, also called one-participant, owner-owned or self-employed 401(k)s, allow a business with no employees other than one’s spouse to contribute in two capacities: as the employee and as the employer. Under this framework, solo 401(k) plans allow most individuals to make higher contributions than they could through other self-employed retirement plans.

These types of 401(k)s can be established as either traditional or Roth plans. In your capacity as the employee, you can make tax-deductible contributions to a traditional plan, up to certain amounts designated by the IRS. Distributions from a traditional plan are taxed upon withdrawal. As the employee, you can also make non-tax-deductible contributions to a Roth plan up to certain amounts designated by the IRS. Withdrawals from a Roth plan are tax-free if the employee is of age and the account meets certain requirements. In your capacity as the employer, you may make matching contributions to Roth plans. 

Opening a solo 401(k) usually takes longer to set up than an IRA, generally requiring consultation with an investment professional. To contribute for a given year, you must open the plan during that calendar year, though contributions to the plan can be made as late as your tax return due date in the following year.

Learn more about retirement accounts.