Many people find themselves outside of the formal workforce from time to time—or for good—some by choice and others after layoffs. Some join the vast gig economy. Others try consulting or freelancing or stay home to care for family. In any case, when people stop picking up a weekly paycheck, they often stop contributing to retirement savings. However, keeping up those contributions, however small, can make a big difference in the income you have after retirement.

Most working people who save for retirement do so through an employer-sponsored program. But you can do it independently. There are a number of ways to go it on your own.

Key Takeaways

  • Self-employed people can invest in a solo 401(k), which has higher contribution limits than the version employers offer.
  • A non-employed spouse can contribute to an IRA if their spouse has taxable compensation.
  • Health savings accounts are designed to pay for medical expenses, but after you reach 65 that restriction no longer applies.

The Solo 401(k)

The solo 401(k), also known as the independent 401(k), is designed for people who are self-employed as sole proprietors, independent contractors, or members of a partnership. It is for people who work on their own or with a spouse and do not have employees. The contributions combine deferred income and profit-sharing elements. 

A limit of $19,000 can be contributed as an employee in 2019. For individuals age 50 and older, an additional catch-up contribution of $6,000 is allowed. In 2020, this amount goes up to $19,500 with an additional catch-up amount of $6,500.

The profit-sharing component for a sole proprietor is 20% of self-employment income reduced by 50% of self-employment taxes. For incorporated businesses, the profit-sharing component increases to 25% of self-employment income with no deduction for self-employment taxes.

That brings the total amount of allowable contributions in deferrals and profit-sharing to $56,000 a year, or $62,000 with the contribution in 2019. In 2020, the total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $57,000, as per the IRS.

For example, suppose that Mary, a 33-year-old marketing manager, left her full-time job when she had a baby. She does some consulting work, earning $20,000 in a year. As the owner of a sole proprietorship, she could put away up to $19,000 of it in employee deferrals and in 2020, she could put away $19,500.

If you want to establish one of these, watch the deadline: Solo 401(k) plans must be established before Dec. 31st of the tax year in order for contributions to be allowed for the upcoming year.

Even small contributions can make a big difference to your retirement savings in the long run. You don't need regular employment to get the tax advantages.

The Spousal IRA

A nonworking spouse who files jointly has the option of investing in either a traditional or a Roth spousal IRA as long as their spouse has taxable compensation. The maximum contribution for 2019 and 2020 for either IRA is $6,000, plus an additional $1,000 for individuals age 50 and older. This allows the family to double its IRA retirement savings.

For example, let’s say Joe, 51, lost his job late last year and hasn’t been able to find full-time work, but wants to continue to contribute toward his retirement. His spouse has taxable compensation of $50,000 for 2019. As long as the couple files jointly, Joe could contribute a total of $7,000 in 2019 to an IRA. That's the standard $6,000 contribution plus a $1,000 catch-up contribution for those aged 50 and above.

Keep in mind that filing status can affect the level of allowable contributions. If Joe and his wife filed separately, he would be unable to contribute any amount to an IRA for the year because he had no taxable compensation. If they filed separately and he had taxable earnings of only $2,000 for the year, his IRA contribution would be limited to $2,000.

Contributions to tax-deferred IRAs can be made as late as April 15 of the following year. 

The Health Savings Account (HSA)

Somewhat surprisingly, a health savings account is another option. An HSA is a tax-advantaged account available to individuals with high deductible health plans (HDHP) for use in paying non-covered medical expenses.

For people who are employed, contributions may be made by both the employer and the employee. Those who are not employed can make contributions on their own behalf. And those contributions are eligible for a tax deduction.

The money deposited doesn't have to come from earned income. It can come from savings, stock dividends, unemployment compensation, or even welfare payments.

The maximum contribution for 2019 is $3,500 for an individual and $7,000 for a family. Additional catch-up contributions of $1,000 are allowed for people 55 years of age or older. For 2020, maximum contribution amounts go by $50, and another $100 for families. ($3,550 and $7,100 respectively). The annual "catch-up" amount will remain $1,000.

So how does a medical savings account count as retirement savings? Distributions used for qualified medical expenses are tax-free at any age. Those not used for medical expenses are included in income and are taxable and likely subject to a 20% penalty. But if you keep these funds in the HSA and begin withdrawing funds at age of 65 or older, you can use it for any purpose, just like a traditional IRA. Like a traditional IRA, you will owe income taxes on the money, but no penalties. (Note that penalty-free IRA withdrawals begin at age 59½.)

In short, contributions to an HSA can be a source of income after retirement.

A Brokerage Account

You can always invest through a brokerage account. The earnings won’t be tax-deferred, but you will be increasing the pot of money that can provide you with a source of income during your retirement.

This can be an excellent way to invest money once you have exhausted your tax-deferred contribution amounts. In addition, since withdrawals from a taxable account aren't taxable again (you've already paid), an investment account gives you added tax-planning flexibility that can be helpful.