If you don’t have a 401(k), you might feel alienated by a lot of the retirement savings advice out there: The first recommendation is often to save in that account.
Over a third of private sector workers don’t have access to a 401(k) or other employer-sponsored retirement plan, according The Pew Charitable Trusts. That leaves them without the benefits that make a 401(k) top-of-the-list when it comes to places to save for retirement — including pretax contributions, automatic salary deferrals and employer matching dollars.
Except for employer matching dollars, much of that can be replicated with other methods of saving.
1. Start with an IRA
An individual retirement account like a Roth or a traditional IRA is the next best thing to a 401(k). These accounts — which you can open on your own at an online broker — allow you to invest up to $5,500 a year, or $6,500 if you’re 50 or older.
Like the 401(k), IRAs have tax benefits: A traditional IRA provides an upfront tax deduction on contributions, with taxes paid on distributions in retirement. A Roth comes with no initial tax deduction, but qualified distributions are tax-free. The Roth has income limits for eligibility; find them here.
2. Use self-employment income to save more
That $5,500 a year with an IRA is a decent amount of money, but it’s probably not enough: Even with steady contributions over 40 years, you’re looking at an end balance of just under $1 million at a 6% average annual return.
If you’re self-employed or have side gig income, consider saving in a SEP IRA or a solo 401(k). Both allow you to save considerably more than your standard IRA — up to $54,000 in 2017, although that’s limited to a portion of your self-employment income. (Here’s a list of retirement plans for self-employed people, with contribution and eligibility information.)
3. Make a health savings account multitask
If you have a high-deductible health insurance plan, you may also have access to a health savings account, which is as good as it gets, tax-wise: The money you put in an HSA is tax-deductible, it grows tax-free and distributions for qualified medical expenses aren’t taxed.
The goal of the account is to pay for medical expenses, but contributions can typically be invested so unused dollars grow and accumulate like any other investment account.
What do medical expenses have to do with retirement? Fidelity estimates that the average couple will spend $275,000 on health care in retirement, not including long-term care expenses. If you can pull even part of that $275,000 from an HSA, you’ll be at an advantage, says Andrew Damcevski, co-founder of Cincinnati wealth management firm RhineVest.
“If you can build up a really big HSA balance, you’ll have a bucket of money to use tax-free for all of your medical expenses,” Damcevski says.
Money not used for those expenses can be pulled out after age 65 for any reason without penalty; it will be taxed as income.
4. Open a taxable brokerage account
Don’t overlook a standard brokerage account, says Mark Wilson, a certified financial planner in Irvine, California.
“Saving in after-tax accounts is not optimal, but it does have some advantages,” Wilson says. “Taxes in retirement will be reduced because you will be drawing from accounts that have already been taxed and taxation will be at long-term capital gains rates.”
Fund all of the above options with direct deposit from your paycheck if available — many employers will split your check among two or three account options, mimicking the automatic deferrals of a 401(k).
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