When it comes to saving for retirement, it's hard to beat a 401(k) plan. The high contribution limits and employer match can really boost your savings. Still, one-third of U.S. private workers don't have access to work-based plans and, even then, many employers don't offer a match. But there's good news: It's possible to retire a millionaire even if you don't have a 401(k) plan.
- If you don't have a 401(k), start saving as early as possible in other tax-advantaged accounts.
- Good alternatives to a 401(k) are traditional and Roth IRAs and health savings accounts (HSAs).
- A non-retirement investment account can offer higher earnings, but your risk may be higher, too.
How Can Investors Pay their Future-Selves?
Individual Retirement Accounts (IRAs)
An individual retirement account (IRA) is a tax-advantaged account that holds investments that you choose. There are two main types of IRAs—traditional and Roth—and the biggest difference between the two is when you pay your taxes.
With traditional IRAs, you get an upfront tax break. You can deduct your contributions when you file your annual tax return. The money in the account grows tax-free. But when you take money out during retirement, it's taxed as ordinary income.
A Roth IRA doesn't provide an upfront tax break. But qualified withdrawals—those made after age 59½ from accounts that have been established for at least five years—are tax-free. This can be a huge advantage, especially if you expect to be in a higher tax bracket during retirement.
IRA Contribution Limits
The biggest drawback to saving in a traditional or Roth IRA is the lower contribution limit. And if you make too much money, you can't contribute at all to a Roth. Whether you have a traditional or Roth IRA, the annual contribution limits are the same. For 2022, you can contribute up to $6,000, or $7,000 if you're age 50 or older—a "catch-up" contribution for employees approaching retirement age. For 2023, the amounts are $6,500 and $7,500, respectively.
Health Savings Accounts (HSAs)
If you're not sure you can save $1 million in an IRA alone, a Health Savings Account (HSA) can be an undercover way to boost your retirement savings. While HSAs are intended to pay for healthcare expenses, they can be a valuable source of income once you retire.
Your HSA contributions are tax-deductible, so they lower your tax bill the year you make them. And withdrawals are tax-free if you use the money to pay for healthcare expenses, including dental and vision care.
HSA Contribution Limits
For the tax year 2022, the maximum HSA contribution amounts are as follows:
- $3,650 for individuals
- $7,300 for family coverage
- $1,000 extra "catch-up" contribution if you're age 55 or older
For the tax year 2023, the maximum HSA contribution amounts are as follows:
- $3,850 for individuals
- $7,750 for family coverage
- $1,000 extra "catch-up" contribution if you're age 55 or older
Unlike flexible savings accounts (FSAs), HSAs don't have a use-it-or-lose-it provision. If you have any money in the account at the end of the year, it stays in the account indefinitely. That means if you make the maximum contribution each year, you could end up with a tidy sum in retirement, assuming you stay healthy.
HSA Withdrawals in Retirement
You can always withdraw money from your HSA tax-free and penalty-free for qualified medical expenses. In retirement, you can withdraw HSA money for things other than healthcare without incurring a tax penalty. Once you turn 65, you can use HSA funds for any reason. You just pay ordinary income tax on the distributions.
Taxable Investment Accounts
If you max out an IRA and an HSA, a taxable investment account (aka, a non-retirement account or brokerage account) is another option to consider. These accounts don’t offer any tax advantages such as deductible contributions or tax-free growth. But you have a shot at earning better returns than you would holding extra cash in a regular savings account.
Of course, investments with higher potential returns also have higher risks, so you have to think about your risk profile and time horizon when deciding how much risk to take.
You can invest as little or as much as you like in a taxable account and put your money into stocks, bonds, mutual funds, exchange-traded funds (ETFs), and real estate investment trusts (REITs), among other options.
Just remember that earnings from these investments are subject to capital gains taxes. Be sure to plan ahead for how that could affect your spending power in retirement.
Annuities offer another way to reach your retirement savings goal. Offered through insurance companies, annuities provide tax deferral coupled with varied investment opportunities. Annuities are available with any of the following:
- A fixed interest rate
- An indexed interest rate, based on the performance of a specific index
- A variable rate, tied to the performance of the underlying investments
The money you stash in an annuity grows tax-deferred but becomes taxable once you withdraw money in retirement. In addition to tax deferral, annuities can provide a guaranteed income stream for a certain number of years or a lifetime.
Real Estate Investments
Another way to save for retirement is through real estate investments. If you have an IRA or brokerage account, you may already have access to the real estate sector through a mutual fund, ETF, or REIT.
Outside of REITs, you can buy real estate outright to generate an income stream during your retirement years. If you invest in a multi-family home, for instance, you can live in one section and rent out the other. This effectively reduces your total living expenses while paying down the mortgage.
Later, you can decide to continue to rent out the property and receive a steady income from rent. Alternatively, you can sell the (ideally appreciated) home and use the proceeds for living expenses or other investments.
Invest in a Small Business
Another option to help you reach your retirement goals is to invest in a small business. A small business investment doesn't necessarily mean becoming a business owner. If you don't want to drive the ship, you can invest in an established company as a silent partner.
Whether you choose entrepreneurship or investing, small business profits are not capped and the potential return on investment (ROI) is higher than other alternatives. Of course, these investments carry with them a great deal of risk. There's no guarantee that the time or money you invest in a small business will generate a substantial return over time. Choose wisely.
How Much Can I Put in a Roth IRA?
The contribution limit for traditional and Roth IRAs for 2022 is $6,000 ($6,500 in 2023). The catch-up contribution for those 50 and older is $1,000, putting the total at $7,000 ($7,500 in 2023).
What Can an HSA Be Used for?
Health savings accounts (HSAs) can be used for various healthcare, dental, and vision expenses. These expenses can be for you, your spouse, or eligible dependents. Note that during retirement you can withdraw money from an HSA without a penalty.
How Can You Use Retirement Funds to Buy Real Estate?
You can use tax-advantaged accounts to invest in real estate, such as a self-directed IRA. Note that the property must be for investment purposes, and you’re not allowed to use it personally.
The Bottom Line
A 401(k) can be an extremely powerful tool to fuel your retirement savings efforts, but not having one doesn't mean you have to retire broke.
You can take advantage of other savings and investment plans to enjoy the kind of retirement you want. Start saving as soon as possible to improve your chance of hitting that $1 million goal for retirement. And be sure you understand the rules for how much you can save and how your contributions will be taxed, so you're not hit with any surprises during your golden years.