Many people find themselves outside of the formal workforce from time to time. Some end up unemployed by choice while others find themselves without work because of layoffs. These individuals have several options available to them in order to keep the income flowing. For instance, some may join the gig economy while others try consulting or freelancing.
When people stop picking up a regular paycheck, they often stop contributing to their retirement savings. This is not wise. Keeping up those contributions, however small, can make a big difference in the income you have after retirement.
This article looks at some of the ways to keep that retirement account growing even when you don't have a steady source of income.
- Self-employed people can invest in a solo 401(k), which has the same rules and maximum contribution limits as a traditional 401(k).
- An unemployed 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 age 65, that restriction no longer applies.
- Taxable brokerage accounts are a savings/investing option once you've maxed out all tax-deferred savings opportunities.
- Gains on sales within a brokerage account are taxed at long- or short-term capital gains rates.
Saving for Retirement Without a Paycheck
Although 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 individual retirement account (IRA), and health savings account (HSA).
The solo 401(k), also known as the one-participant k and uni-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.
For 2022, as the employee participant, you may contribute up to $20,500 to your solo 401(k). For 2023, that figure is $22,500. Individuals age 50 and older can contribute an additional catch-up contribution of $6,500 for 2022 and $7,500 for 2023.
Employer Contributions for a Solo 401(k)
As your own employer, you may also make employer contributions to your account that are in addition to your participant contributions. For 2022, the total allowed amount of these combined contributions (participant deferrals and profit-sharing) is $61,000 a year, or $67,500 with catch-up contributions. That rises to $66,000 in 2023 ($73,500 for catch-up contributors).
According to the IRS, you must calculate the maximum amount for deferrals and nonelective contributions with a special computation.
"When figuring the contribution, compensation is your “earned income,” which is defined as net earnings from self-employment after deducting both one-half of your self-employment tax, and contributions for yourself."
Example of a Solo 401(k)
Let's say that Mary, a 33-year-old marketing manager, left her full-time job when she had a baby. She does some consulting work and earns $30,000 in a year. As a sole proprietor, she can put away up to $20,500 in employee deferrals for 2022. For 2023, she can contribute up to $22,500. As mentioned above, those 50 and older can make additional contributions of $6,500 and $7,500, respectively.
Solo 401(k) plans must be established by December 31 of the tax year for which contributions will be made.
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 2022 for either IRA is $6,000, plus an additional $1,000 for individuals age 50 and older. For 2023, the maximum is $6,500 (or $7,500 with the $1,000 catch-up amount). This allows the family to double its IRA retirement savings (although, as noted by the IRS, "the total of your combined contributions can’t be more than the taxable compensation reported on your joint return.")
Tax-Filing Status Affects Contribution Amounts
Keep in mind that your filing status can affect the level of allowable contributions. Let’s say Joe, 51, lost his job late in 2020 and hasn’t been able to find full-time work during 2021, but wants to continue contributing toward his retirement. His spouse has taxable compensation of $50,000 for 2021.
If Joe and his wife filed separately, he would be unable to contribute any amount to an IRA for 2021 because he had no taxable compensation that year. If they filed separately and he had taxable earnings of only $2,000 for 2021, 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 2022. That's the standard $6,000 contribution plus a $1,000 catch-up contribution for those age 50 or older. You can contribute to an IRA as late as April 15 of the year following that for which you're making your contribution.
Health Savings Account (HSA)
A health savings account (HSA) is another option. An HSA is a tax-advantaged account that can help you to save for 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 2022 is $3,650 for an individual and $7,300 for a family. For 2023, it increases to $3,850 for an individual and $7,750 for a family. Additional catch-up contributions of $1,000 are allowed for people 55 years of age or older.
Using an HSA for Retirement Savings
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 your age, they can be subject to a 20% penalty.
If you keep these funds in the HSA and begin withdrawing them at the age of 65 or older, you can use them for any purpose, just as with a traditional IRA. Similarly, 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 for your retirement 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 exhaust your tax-deferred contribution amounts. In addition, since withdrawals of contributions 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. However, be aware that withdrawals of gains from a brokerage account are taxed at capital gains rates.
How Do I Save for Retirement If I’m Unemployed?
You can always save money for retirement, no matter what your working status. For instance, you can put any available funds you have into a savings account or brokerage account with a money market fund feature that earns interest. How much you save may be a challenge due to your lack of income but any amount can help you.
Plus, while the two options just mentioned aren't tax-advantaged accounts, you can open a Health Savings Account if you have a high-deductible health plan. This type of account allows you to make tax-deductible contributions. Withdrawals used for qualified medical expenses are tax free.
Can I Contribute to an IRA If I’m Not Working But My Spouse Is?
Yes, if you file taxes jointly and your spouse has taxable income, you can open an IRA and contribute the maximum amount allowed for the particular tax year.
How Does a Paycheck Matter to How I Save?
With regard to how you can save, one of the benefits related to earned income (having that paycheck) is that we get easy access to tax-advantaged accounts for our long-term saving and investing. Without earned income, we can still save what money we can, but we won't necessarily get the tax-advantaged compounding growth opportunities offered by, say, a 401(k) or IRA.
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.