A 401(K) PLAN MAKES IT convenient to save for retirement. The money is automatically withheld from your paychecks before you ever get a chance to spend it. You immediately get a tax break on your traditional 401(k) contributions, and sometimes your employer contributes additional money to the account. Some workers are even automatically enrolled in the plan without having to fill out any paperwork or make saving and investment decisions.
Saving for retirement without a 401(k) plan takes a little more effort. But if you are willing to take some initiative, you can still qualify for many of the tax breaks and investment gains that workers with 401(k) plans enjoy. Here are some 401(k) alternatives that can help you save for retirement:
Fund an IRA
You can defer paying income tax on up to $6,000 that you contribute to an IRA, and investors age 50 and older can save as much as $7,000 in an IRA. Couples can contribute $6,000 to an IRA in each of their names, even if only one spouse works, for a total of $12,000 in tax-deferred savings. And if both spouses are age 50 or older, they can shield as much as $14,000 from income tax in a traditional IRA in 2019. Income tax won’t be due until you withdraw the money from the account.
IRAs also give you a greater variety of investment options than 401(k) plans, and you can shop around for accounts and funds that charge especially low fees. “When you don’t have a 401(k) plan, you have to pick a brokerage firm and open up the account,” says Paul LaViola, a certified financial planner and founding partner of Foundation Wealth Management in Media, Pennsylvania. “We would suggest a discount brokerage firm and no-load funds.”
Open a Roth IRA
Roth IRAs have the same contribution limits as traditional IRAs, but they are taxed differently. You contribute after-tax dollars to Roth IRAs, and then you can withdraw the money, including investment earnings, tax-free in retirement. “With a Roth, you don’t get a tax deduction, but you don’t pay any tax on the earnings, and the withdrawals are tax-free,” says Jon King, an accountant and certified financial planner for Pegasus Financial Solutions in Austin, Texas. To qualify for tax-free distributions, you must be age 59 1/2 or older, and the account needs to be at least five years old. You can contribute to both a traditional and Roth IRA as long as your deposits to both types of accounts don’t exceed the annual contribution limits.
Set Up Direct Deposit
One of the major perks of 401(k) plans is that the deposits are withheld from your paychecks, which prevents you from spending the money or having to take action to save. You can replicate this by setting up a direct deposit from your paycheck to an IRA or other type of investment account. You can max out an IRA by contributing $500 per month or $250 per semimonthly paychecks. If you’re 50 or older, you will need to contribute $583 monthly or $292 semimonthly to get the maximum possible tax perks.
Save Your Tax Refund
Another way to fund an IRA is to use part of your tax refund. IRS Form 8888 allows you to directly deposit your tax refund into up to three different saving or investment accounts, including an IRA.
Claim the Saver’s Credit
Contributing to a traditional or Roth IRA could qualify you for the saver’s credit. This tax credit is worth between 10 percent and 50 percent of the amount contributed, up to $2,000 for individuals and $4,000 for couples, with the largest credits going to people with the lowest incomes. Retirement savers with adjusted gross incomes below $32,000 for singles, $48,000 for heads of household and $64,000 for married couples are eligible for the saver’s credit in 2019.
Use a Taxable Investment Account
If you are able to save more once you max out an IRA, you can contribute to a taxable investment account. While you won’t be able to defer taxes on this account, you can minimize taxes by putting highly taxed investments in your retirement account and holding investments taxed at a lower rate in your taxable accounts. “If you have investments in your taxable account, you in many ways can qualify for more favorable tax treatment than with an IRA,” says David Gardner, a certified financial planner and founding partner of Confluence Financial Advisors in Boulder, Colorado. “When you sell investments that you have purchased in your taxable account, you are paying taxes at a much lower long-term capital gains tax rate.” All withdrawals from your traditional IRA are taxed at the often much higher regular income tax rate, regardless of what you invested in inside the IRA.
Contribute to a Savings Account or CD
Everyone needs some liquid cash in a savings account, certificate of deposit or other Federal Deposit Insurance Corp.-insured account to cover repairs, emergencies or other unexpected costs. You can often withdraw your money at any time without penalties or significant tax consequences. While interest rates are typically low, these accounts are insured by the federal government never to lose value, so the savings will be there when you need it.
Original article written by Emily Brandon at U.S. News