No 401(k), No Problem: Alternatives to the Employer-Sponsored Retirement Plan

Regardless of how much we love our jobs or our line of work, just about all of us look forward to saying "goodbye" when the time comes to retire. Since 401(k)'s and other employer-sponsored plans are the primary retirement vehicles, we bear the responsibility to save for retirement on our own. So what do you do if you don't have access to an employer-sponsored plan? How do you build your retirement savings when you aren't given the road map? 

Saving for retirement can be a challenge even when your employer offers you this benefit, and it becomes an even bigger hurdle when you have to figure it out on your own. There are an array of different reasons why someone may need to seek out a retirement savings plan on their own: they may work as a part-time employee or on a contract basis, at a small business that does not offer any retirement benefits, or they own their own business and are self-employed. 

In a recent study, the Government Accountability Office finds that “as many as half of all households with Americans 55 and older have no retirement savings at all,” while T. Rowe Price states that 84 percent of millennials want to “make managing their financial situation a higher priority this year.” The picture seems pretty clear: Americans want to be fiscally responsible. The question is how can they do it, especially if they are not offered a plan through their employer? 

There are many savings vehicles out there that are designed for this purpose, you just have to know how to use them. Here we go over different tools available for those who need to save on their own:

Picking the right tools to help pave your financial future

myRA

If you want to get your feet wet but want minimal risk and tax-free growth you can go for a myRA or My Retirement Account. This is a government-funded retirement investment account and it is “invested in a single United States Treasury retirement savings bond, which will not lose money and is backed by the United States Treasury.” While your account can only hold funds for up to 30 years and at no more than $15,000, whichever comes first, it will earn interest comparable to the rates of investments in the Government Securities Fund.

This alternative provides participants access to a retirement vehicle that is incredibly simple to use, safe and secure to transfer and monitor funds, and most of all, affordable and easy to make a part of your financial life. 

Individual Retirement Accounts

As long as you have received taxable earnings within a given year, you are qualified to open an Individual Retirement Account or IRA. You can choose from a traditional or Roth IRA which helps you accumulate towards the same goal, however, the major difference is when you pay taxes.

Funds from a traditional IRA are taxed the year you withdraw funds, so most likely during retirement, while funds deposited into a Roth account are taxed before they are deposited into the account. Also, there are age and income restrictions depending on the account you choose. At 70 1/2 years and older, you cannot make any more contributions to your traditional IRA, and depending on your filing status and income, you may not be allowed to make any more contributions to your Roth account. While both achieve the goal of saving for your retirement, a Roth IRA is the most beneficial of the two because of the tax-free withdrawals participants are privy to at retirement.

Solo 401k

If you're an entrepreneur, and even if you are using one or both of the options already mentioned, the solo 401(k) may be an appropriate addition to your investment plan. It follows the same rules as a traditional 401(k) except it’s limited to use only by a sole proprietor and their spouse. 

The business owner acts as an employer and employee, so they have the advantage of contributing in both elective deferrals and employer non-elective contributions. However, for 2015 & 2016, the overall contributions cannot exceed $53,000. This does not include catch-up accounts for individuals 50 years of age and older.

Defined Benefits Plan

Pensions may be a thing of the past for most employers, but as an entrepreneur or business owner, you may still be able to set up one of these plans. With this type of retirement savings plan, you would receive a fixed monthly amount throughout retirement based on how much you've paid into the plan. The reason why a lot of large companies don't sponsor this type of plan anymore is because it's very expensive for the employer since they technically make all of the contributions. When you are the “employer” and “employee” however, you can deduct the cost of fully funding a fixed pension for yourself in the last few years before a given retirement age, even if you plan on continuing to work. 

While you'll have to make steady contributions each year (this is a requirement under law), this option can be a great savings tool, especially if you're over 50. Take for instance this example from Forbes: a professor in his mid-60s shelters his $100,000 consulting income for the last decade in a DB plan and when it's fully funded, he shuts the plan down, rolls that money into an IRA, watching it continuously grow tax-deferred until he's required to take minimum distributions at 70 1/2. Whether you have another stream of income, such as a consulting gig, or own your own small business, a defined benefit plan could be the way to go. Make sure you speak with a tax advisor and ERISA attorney before setting one of these up – because as good as they can be, there are a lot of rules and requirements to follow.

Brokerage accounts

You can also take a more independent approach to long-term savings and invest your money in products such as stocks, bonds, mutual funds, target-date funds, or money market funds. 

Whether you work with a financial advisor, a robo-advisor, or do it all on your own, you have the ability to invest in multiple portfolios, diversify, and thus gain multiple streams of income for the future.

However, it's important to understand that investing in a brokerage account doesn't always guarantee stable or even significant revenue, and it doesn't provide any tax advantages at any time for your investments.

There are many components that go into opening an account such as deciding whether you will have a cash account or a margin loan account, understanding all of the risks that come with each account, and knowing what the best investment strategy is for you. It's incredibly important to gain as much knowledge, so you can be able to minimize any risks when you invest.

Saving Apps

Today, apps reign supreme and the ability to save is only a swipe away. There are many savings apps that allow you to invest, withdraw, and monitor your investments all from your phone, using only your spare change in some cases. “Investing is an inherently fast-paced, on-the-go industry, rendering it an especially good fit for mobile technology,” says Raul Moreno, co-founder and CEO of iBillionaire. 

There are a ton of new apps sprouting up, such as Acorns, Digit, and Betterment among many others. Lower feeds and the ability to track investments while waiting in the check-out line can make many aspects of long-term saving easier, but there are also some drawbacks. Be aware that the availability to check your accounts all the time and monitor every dip in the market may encourage you to make trades or withdrawals on impulse. As always, when saving for retirement, keep your long-term goals in mind and try not to get too caught up in the day-to-day (or minute-by-minute) changes in the financial markets. 

Dividend-Paying Stocks

What is a cash dividend?  A cash dividend is a distribution of a portion of a company’s earnings to its shareholders. Not all companies pay dividends. Generally, dividend-paying companies are profitable financially stable companies that pay out a portion of their earnings to shareholders as a way to reward shareholders for investing in the company. The dividend payout may increase over the years if the company continues to grow and increases its profitability. 

A company that has a history of paying consistent dividends may be an attractive investment opportunity for an investor that is looking for a steady stream of income from an investment. Be sure that you're choosing a "safe" dividend though by looking for a company that can cover their annual dividend payments with cash flow from profitably operating the business as compared to a company that is borrowing money to meet its dividend obligation. 

Basic research on the company you're thinking to invest in can help you avoid this. Look for signs such as:

• High payout ratios
• Falling cash flows growth
• Limited cash
• Large debt burdens
• Missed earnings 
• Layoffs

These indicators can give you a fair warning that the company is struggling and may be forced to reduce or even eliminate its dividend.   

Saver’s Tax Credit

While the Saver’s Tax Credit is not a saving vehicle, it is definitely beneficial as a means of investing more into your retirement fund. It rewards low-income and moderate earners who need additional assistance in saving for their retirement. Your eligibility hinges on your filing status, and your modified adjusted gross income (MAGI). With this tax credit, you may reduce your tax liability to $0, but the non-refundable tax credit that will be applied to your federal tax income return can only be used for investing in an IRA, 403(b), 457 and/or a 401 plan. 

Source:  IRS Announces 2015 Pension Plan Limitations, Internal Revenue Service, IR-2014-99 (Oct. 23, 2014).

Whether retirement is in the distant future or just looming around the corner, it's important to be prepared for this milestone. Saving for retirement can be intimidating, even with a tool like the 401(k) at your disposal. However, if you don't have an employer-sponsored plan available to you, that doesn't mean you won't be able to save. Using one, or a combination of any of the savings vehicles mentioned here, should help ensure you live out retirement the way you want.