But not everyone is a full-time employee. And not everyone works for a big company or gets access to 401(k) contributions.
Money expert Clark Howard says investing for retirement should be your No. 1 investment priority. So what should you do to work toward that goal if you can’t use a 401(k)?
What Is the Best Retirement Account Option if I Don’t Have Access To a 401(k)?
I don’t have access to a 401(k). What are my options to save for retirement?
That’s what a listener recently asked Clark Howard.
Asked Alex in California: "I recently got laid off. However, this is not a sob story. I have offers for positions but if I were to take one of those jobs I wouldn't have access to employer-provider 401(k) or retirement plans.
"What would be my options to save for retirement? I already max out an individual Roth IRA."
Alex is on the right track with the Roth IRA. Clark is obsessed with Roth IRAs for retirement. Here's how to open a Roth IRA and contribute up to $7,000 (under age 50) or $8,000 (50+) in 2024.
If you’re in Alex’s position, Clark says, figure out which of these two camps you belong to:
- You'll start getting full-time benefits, including access to a 401(k) or other workplace retirement plan, within two years.
- You won't have access to a workplace tax-advantaged retirement account long-term.
Plan A: You’ll Get Access To a Retirement Account at Work Within Two Years
Buckle up for this one. Let’s say Alex knows he’ll get access to benefits at his new position within a year or two. Clark offers a creative solution.
“Set up a shadow savings account. Simulate what would’ve been going into [your 401(k)] from your paycheck,” Clark says.
“When you do receive benefits, start contributing to the 401(k) beyond the percent of your pay you would normally do. That money you’ve put aside until you [get access] to the 401(k) is money that you can use for the deficit spending you’re now creating in your life because you’re putting max dollars into the 401(k).”
Why two years or less? Well, Clark wants as many of your dollars as possible in a tax-sheltered environment. You can play catch up with your contributions.
If you’re going to go without retirement account access at work for more than two years, you revert to an old principle: Time in the market is better than timing the market.
You don't want your investable money sitting in a savings account for too long, even if you can get in the neighborhood of 5% at a simple savings account at the moment.
Once you’ve emptied the excess funds by overcontributing to your 401(k), reduce your contribution percentage back down to an affordable level.
Plan B: You Won’t Have Access To a Workplace Retirement Account for Years
Clark’s master plan sounds great if you will get access to a 401(k) relatively soon. But what if that’s just not in the cards for you?
A Roth IRA is a great place to start. But if you want to contribute more each year to retirement than the max, there are other options.
There’s another fork in the road depending on whether you’re a W-2 or 1099 employee.
For 1099 (or contractor) jobs, consider a SEP IRA. It offers the chance to set aside huge bucks: 25% of your pay or $69,000 a year, whichever is less. You can also consider starting a solo 401(k), although it will take more work to set up.
For W-2 (or full-time employee) jobs, that just don't offer 401(k) access, consider investing in a taxable account at Fidelity, Vanguard or Schwab.
“If you think it could be long-term, I’d want you to do the next-best thing which would be a taxable investment account that you only put in things like broad-market exchange-traded funds or broad-market index funds that have very favorable treatment long-term in the tax code,” Clark says.
“Yes, you will owe tax eventually. But at the far more favorable long-term capital gains tax rate. Not as good as being in a retirement account at work. But the next-best thing.”
Final Thoughts
If you don’t currently have access to a 401(k) or other workplace retirement account, try to figure out whether that’s likely to change in the next two years. If so, set aside the contributions you’d normally make and then overcontribute for a few years once you get access.
Otherwise, look into a Roth IRA, SEP IRA, solo 401(k) and a regular brokerage account.
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