How to Save When You Don't Have a 401(k)

Kip Tips

How to Save When You Don't Have a 401(k)

You do have other options if your employer doesn't offer a retirement plan or if you're self-employed.

The percentage of employers offering work-based retirement plans has dropped over the past ten years, according to new analysis by the Employee Benefit Research Institute. Only 61.8% of employers sponsored retirement plans in 2009 -- down almost 8 percentage points from a high of 69.4% in 1999.

An employer-sponsored retirement plan, such as a 401(k), is a great way to save for retirement. Money you contribute comes out of your paycheck before taxes -- lowering your taxable income. You pay no taxes on investment earnings until you withdraw money. And some employers match your contributions or contribute a percentage of your income regardless of whether you contribute.

But if you don't have a 401(k) or similar plan at work, you do have other tax-advantaged retirement-plan options. And setting up an account can be easy.

Traditional IRA. Anyone who's younger than 70½ and has earned income can open an individual retirement account. You can contribute up to $5,000 a year, and you can deduct your contributions when you file your income-tax return. However, you'll pay taxes on your withdrawals.


You have three main options when it comes to opening an IRA: a bank, a brokerage or mutual fund company. And you can invest in any kind of security -- stocks, bonds, mutual funds, etc. For rookie IRA investors, mutual funds are probably the simplest option -- you can leave the stock picking to the pros and spread your money and your risk instantly across a large number of investments.

Roth IRA. You can't deduct contributions to a Roth, but you can withdraw your money tax-free in retirement -- which makes the Roth the best choice for most savers. Like a traditional IRA, you can contribute up to $5,000 a year and invest the money how you want. See Why You Need a Roth IRA to learn more about the perks of this retirement account.

You can't contribute to a Roth, though, if you're single and earn more than $120,000 or married and earn more than $176,000. However, you now can convert a traditional IRA to a Roth regardless of how much you earn (the income-eligibility limit on conversions disappeared this year). See our special report on Roth conversions to learn more.

Plans for the self-employed. You have several retirement-savings options: individual 401(k), SEP IRA, Keogh and SIMPLE IRA. Contributions to any of the plans are tax-deductible. See Do-It-Yourself Retirement Plans to find out which account is best for you.

Regardless you which account you choose, you need to fill it with the right investments to help you reach your retirement goals. For help finding the right mix for your situation, see our 22 model portfolios.

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