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, freelancing, or staying home to care for their family.

When people stop picking up a regular paycheck, they often stop contributing to retirement savings. This is not wise. Keeping up those contributions, however small, can make a big difference in the income you have after retirement.

Key Takeaways

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

How to Save for Retirement Without a Paycheck

Though it's true that the majority of working people save for retirement via an employer-sponsored program, you can do it on your own. It's easier than you think to save money without a regular paycheck. And you don't need regular employment to get the tax advantages that come with many plans.

There are a number of ways to use existing retirement-savings vehicles to save independent of an employer, including a solo 401(k), spousal IRA, and health savings account (HSA).

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 who do not have employees. The contributions combine deferred income and profit-sharing elements. 

In 2021, you may contribute up to $19,500 to a solo 401(k). Individuals age 50 and older can contribute an additional catch-up contribution of $6,500. 

Allowable contributions for a solo 401(k)

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.

In 2021, that brings the total amount of allowable contributions in deferrals and profit-sharing to $58,000 a year, or $64,500 including catch-up contributions.

Example of a solo 401(k)

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 $19,500 of it in employee deferrals in 2021.

Watch the deadline: Solo 401(k) plans must be established before Dec. 31 of the tax year for contributions to be allowed for the upcoming year.

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 2020 and 2021 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.

Allowable contributions for a spousal IRA: Tax-filing status matters

Keep in mind that filing status can affect the level of allowable contributions. Let’s say Joe, 51, lost his job late in 2019 and hasn’t been able to find full-time work during 2020, but wants to continue to contribute toward his retirement. His spouse has taxable compensation of $50,000 for 2020.

If Joe and his wife filed separately, he would be unable to contribute any amount to an IRA for 2020 because he had no taxable compensation in that year. If they filed separately and he had taxable earnings of only $2,000 for 2020, his IRA contribution would be limited to $2,000.

Example of a Spousal IRA

Here's what happens if Joe and his wife file jointly. With the wife's $50,000 income, Joe could contribute a total of $7,000 to an IRA for 2020—and has until April 15, 2021, to do so. That's the standard $6,000 contribution plus a $1,000 catch-up contribution for those aged 50 or older.

You can contribute to an IRA as late as April 15 of the following year.

Health Savings Account (HSA)

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

For people who are employed, both the employer and the employee may contribute to the account. Those who are not employed may contribute on their own behalf. And those contributions are eligible for a tax deduction.

Allowable contributions for an HSA

The maximum contribution to an HSA for 2021 is $3,600 for an individual and $7,200 for a family. Additional catch-up contributions of $1,000 are allowed for people 55 years of age or older. 

Can you use an HSA for retirement savings?

Yes. Here's why: Distributions used for qualified medical expenses are tax-free at any age. Distributions that are not used for medical expenses are counted as income, and are taxable. In addition, depending on age, they can be subject to a 20% penalty.

But if you keep these funds in the HSA and begin withdrawing them at the 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 tax on the money, but no penalties (penalty-free IRA withdrawals begin at age 59½).

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

Saving for Retirement via 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.

The Bottom Line

Saving for retirement without a regular paycheck is possible. You have several options to choose from that offer tax advantages.

For those who are eligible, solo 401(k)s, spousal IRAs, and HSAs can help build a retirement nest egg. Investments in a brokerage account, while not tax deferred, can help grow retirement savings, too. Regardless of which route you choose, start saving for retirement as early as possible so your money has more time to grow.