More than 28 million full-time American workers don’t have access to a 401(k) plan. This is often because they are self-employed or working for one of the more than 5 million smaller companies that doesn’t offer a 401(k) plan. Not having access to a 401(k) shouldn’t keep you from saving for your retirement though, as there is still much you can do to save for retirement.
Here are two retirement accounts you can open outside your employer to contribute toward your retirement savings.
Retirement plans outside of your employer are called Individual Retirement Plans or IRAs. The IRS introduced these plans with the Employee Retirement Income Security Act of 1974, or ERISA, and they have steadily grown in popularity over the years. As a way to incentivize retirement savings, the IRS allows each individual to contribute $6,000 per year into this account and deduct that from your annual income on your tax return. If you are over the age of 50, you can contribute a “catch up” amount and contribute a total of $7,000.
It is important to note that in order to contribute to an IRA, you must have “earned income.” The IRS allows for a spousal IRA contribution where a non-working spouse can contribute to their own IRA as long as the other spouse has earned income.
If you’re self-employed, please note that you can start a SEP-IRA and you’re allowed to save more than the IRA limit mentioned above. The exact amount you can save is 25% of your net earnings from self-employment, up to $56,000 in 2019.
The second retirement account available to you is the Roth IRA. It carries the same contribution guidelines of $6,000 for those under age 50 and $7,000 for those over age 50. The value of the Roth IRA is that gains are tax-free when the money is withdrawn, provided the account has been open for five years and you’re over 59 and a half years old. To contrast, when you withdraw money from a traditional IRA, the amount is fully taxable at income tax rates. While you do not get the immediate tax deduction for the contribution like you do with the traditional IRA contribution, the withdrawn money is fully taxable. This is incredibly valuable. When you plan for retirement, it is a good idea to know what the tax implications will be with each scenario, because it’s hard to know what the income tax rates will be in the future.
Be aware that the Roth IRA comes with income restrictions; in 2019, if you are single, the phase-out range begins at $122,000; if you are married and filing jointly, the income phase-out range begins at $193,000. You will want to check the IRS website for specific information. In effect, if you make too much money, you are ineligible to contribute to a Roth IRA.
What if One Spouse has a 401(k), 403(b) or TSP?
Using the IRA accounts mentioned above are a great way to save for retirement, but if you are married and your spouse has the ability to contribute to a 401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan (TSP), then you might consider maxing their account as part of your retirement savings plan as well. This is especially true if their employer offers a 401(k) match.
According to the IRS, the 401(k), 403(b), most 457 plans, or the federal government’s Thrift Savings Plan (TSP) give you the ability to contribute more per tax year than the IRA or Roth IRA. In 2019, an employee is able to contribute $19,000, and those over 50 years old can also catch up with an additional $6,000.
Determining what option is best for you can be difficult. Should you open a traditional IRA or a Roth? Should you contribute the max? If not, what amount should you contribute? These are questions that can be answered by a CPA or other financial professional. Generally speaking, I always suggest contributing the max that you can. If you are married and your spouse has access to a 401(k) savings plan, you might consider how to maximize their contributions and possible employer matching.
If you have any other questions regarding any of these retirement savings account options or if you’d like a referral to a CPA in our area, please don’t hesitate to reach out.
Registered Representatives offering securities through Cetera Advisor Networks LLC, member FINRA/SIPC. Cetera is under separate ownership from any other named entity.
Jason LaBarge, Managing Partner at Premier Planning Group, 115 West Street, Suite 400 Annapolis, MD 21401 443-837-2520
Opinions expressed are that of the author and are not endorsed by the named broker dealer or its affiliates. The information in this article is not intended as tax or legal advice, and it may not be relied on for the purpose of avoiding any federal tax penalties. You are encouraged to seek tax or legal advice from an independent professional advisor.