If you are self-employed or don't get a retirement account at work, you can open your own self-directed retirement account. Traditional IRA, Roth IRA, SEP IRA, and Solo 401(k) plans are perfect for people who have to fund their own retirement without employer support. Super savers can use a Health Savings Account (HSA) to save even more with a great tax advantage.
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Are you one of the millions of workers without a retirement plan at work? Or perhaps you're self-employed and don't have an employer at all? In either case, it's imperative that you take your retirement savings and investments into your own hands. Employer retirement accounts are great, but many businesses don't take on the added expense of helping their employees prepare for the future. If you don't get a 401(k) at work, you can use these strategies and accounts to save for retirement on your own.
Open your own self-directed IRA The easiest retirement account to open and use for most legal US residents is an Individual Retirement Account (IRA). Even if you have a retirement account at work, most people can open an IRA or Roth IRA for additional retirement savings with a tax benefit. Traditional IRA accounts allow you to save and invest for retirement with pre-tax dollars. That means you don't pay income taxes on that portion of your income in the year you contribute. Instead, you'll pay income taxes on withdrawals during retirement. Roth IRAs use after-tax dollars, which means you pay taxes when you contribute but qualified withdrawals are tax-free. You can open an IRA at most investment brokerage firms. If you already have a brokerage account to invest in stocks, you can generally open an IRA at the same place and manage the account with one login. But not all IRA providers are the same, so it's worth shopping around before going with a company for convenience. The best IRA and Roth IRA accounts don't have any recurring monthly fees and let you invest in stocks and ETFs with no commission. You can also find a managed portfolio, or robo-adviser, where your funds are invested in a professionally designed portfolio for a fee. Roth IRA and traditional IRA accounts have a contribution limit of $6,000 for 2020 — add an extra $1,000 if you're 50 or older. Income limits also apply, so six-figure earners should make sure they are eligible before making contributions. Try a SEP or Solo 401(k) if you're self-employed If you're self-employed or work as a contractor, you can use your business to open and fund an account for retirement. The two best accounts for this are generally a SEP IRA or a Solo 401(k). SEP is short for Simplified Employee Pension. SEP IRA accounts are great for solo self-employed workers. Companies with up to 100 employees are able to contribute to their employees' retirement savings including their own. They are easy to set up and get started, sometimes completely online. For 2020, you can contribute the lower amount of $57,000 or 25% of your employee compensation. Limits and rules around SEP accounts make Solo 401(k) plans more exciting for many self-employed workers. While they take a bit more paperwork to get started, they are much more flexible and typically have the same pricing and investment availability. However, many brokerages don't support Solo 401(k) accounts. This type of account has the same $57,000 annual limit as an SEP but is more flexible with how you contribute, including allowing after-tax Roth contributions. SEP accounts don't allow catch-up contributions for those 50 and older. Use your HSA for retirement Health Savings Accounts (HSAs) are made to help you save for medical costs, but they have a hidden superpower that makes them ideal for retirement as well. If you have the means to pay for your medical costs out of pocket while saving more for the future, an HSA can save you a bundle. You can only use an HSA if you have an eligible high deductible health plan (HDHP). For 2020, qualifying plans have a deductible of at least $1,400 for individuals or $2,800 for families. It must also have an in-network out-of-pocket maximum of $6,900 or less for an individual or $13,800 for a family. If your health plan checks those boxes, you can contribute to an HSA with pre-tax dollars and get qualifying withdrawals for free. You can reimburse yourself or use an HSA to pay for medical expenses right away. Or you can save up those receipts for a few decades and reimburse yourself in retirement tax-free. If you qualify, an HSA is the best tax-advantaged account around. For 2020, the most you can save in an HSA is $3,550 for individuals and $7,100 for families. Don't discount taxable investment accounts While you don't get any tax benefits for saving in a regular brokerage account, it can also be a big part of your retirement strategy. In addition to the ability to save as much as you want with no limits, you can withdraw at any time with no extra penalties. Taxes apply to investment profits, but that may be worthwhile if you plan to retire early. Quality brokerage accounts today don't charge any monthly fees with no minimum balance requirements. Since last year, many allow you to trade stocks and ETFs with no commissions. If you maximize your tax-advantaged retirement accounts or just want to diversify with an account that doesn't use age-limits for withdrawals, this is the place to go next. Neglecting retirement savings is a big mistake Social Security is a cornerstone of American retirement, but it isn't enough for most people to maintain the same quality of living in their golden years. Experts often suggest saving at least 10% to 15% of your income for retirement to keep the same lifestyle when you stop going to work. It's important to take retirement into your own hands. It's up to you to save for a prosperous and comfortable future. Even if you don't have an employer's support, you can take steps to solidify a great retirement. If you haven't already, it's time to get started.
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