When Your Job Doesn’t Offer You a Retirement Plan

Personal Capital’s recent survey states that 27% of women aren’t offered a work-sponsored retirement plan, compared to only 19% of men. So what should you do if your employer doesn’t offer a retirement plan?

Remember that you are paying for any retirement plans or employment benefits you receive. It’s not a direct cost to you, but you are receiving a lower wage because these benefits. This is why your income as an independent contractor is or should be higher.

Retirement Plans

The main point of a retirement plan is that you can contribute to it with pre-tax dollars. This money then grows tax-free and you will pay taxes on the income when you take it out.

No doubt that retirement plans are potent investing tools because of the tax-savings alone but they certainly aren’t limited to your employer. There is no law which forces you to be an employee in order to max out your retirement contributions.

Common retirement plans are 401k, 457, 403b, 401a, Keogh, IRA, and cash balance plans. You can contribute to most of these even as a sole proprietor.

Employer Sponsored Retirement Plans

When I worked for Kaiser Permanente starting in 2009, I got a 401k option which I didn’t even max out. A 401k is a voluntary retirement account – so I had to elect to defer money into this account. Not just that, but then I had to choose which funds to invest that money into.

3 years into the job I made partner at KP and got a Keogh plan. Money was taken from my paychecks and deposited into this Keogh plan. I was still an employee but a partnered employee, receiving K1 distributions.

If, for whatever reason, I was an employee and wasn’t offered a retirement plan then I would have left. As a medical professional I don’t have problems finding jobs so it makes little sense to stay with an employer who doesn’t offer their medical employees retirement benefits.

Here are 3 options for those of you who aren’t offered employer sponsored retirement plans:

Option 1: Individual 401k

I can also open my own individual 401k. These are also called solo 401k, available at Vanguard, Fidelity, and many other brokerages.

If you’re an employee and are getting paid on a form W2 then you cannot open your own solo 401k. But, if you are earning some money on the side then you can open an extra 401k just for the other business. Yes, you can have two 401k’s.

You can contribute the traditional $18,500 (as of 2018) annually and, if structured properly and enough income is earned, even up to the $55k limit allowed by the IRS. One portion is the $18,500 for you as an individual and then there is a 25% ’employer’ match  – totalling $55k.

Option 2: IRA

Even if you are an employee without any retirement benefits, you can always contribute to an IRA. Everyone can contribute to an IRA – but not everyone can get a tax deduction for it.

The downside is that if you are earning past a certain amount then the money isn’t tax-deductible.

For the high-earners, the money invested in an IRA will still grow tax-free but it’s after-tax money on which you’ll pay taxes once again when you go to take it out in retirement – referred to as double taxation, unless you keep records to prevent this from happening.

A backdoor Roth IRA is one way of getting around this double taxation. But there are other issues with a backdoor Roth which is one reason that I don’t use it.

Option 3: Private Brokerage

Finally, regardless of your work situation, whether an independent contractor or employed, you can always contribute towards retirement in a private brokerage.

The money won’t grow tax-free and you’ll only contribute with money that was already taxed but at least you’ll have retirement savings. When you’re ready to take out the money, most of it won’t be taxed, only the portion which grew will be taxed at capital gains tax rates.

Saving for retirement

Retirement accounts don’t make for a secure and healthy retirement. It has to do with how much you set aside. And though you can get a nice tax-savings for maxing out retirement accounts, there are multiple other factors to consider.

If you save $10M for retirement and plan on withdrawing and spending $200k a year, your tax burden in retirement might be rather ugly. Whatever you saved in taxes during your working years might get eroded by this high spending habit.

On the other hand, if you spend very little in retirement, even if all the money was in a private brokerage account, your tax rate might be incredibly low.

In fact, one downside to tax-deferred retirement accounts is that you won’t have access to them until you hit age 60. If you try to access that money sooner – even if you retired early – you’ll be hit with a tax penalty.

Do this for retirement

If you do nothing else for retirement, set some money aside in a CD. CD’s are finally increasing their yields so it’s a viable option for those of you who are allergic to stocks and bonds.

If you’re willing to take some risk with your money, invest your dough in a broad index fund such as VTI. You can purchase this ETF in damn near any brokerage account.

Click here to learn about investing in VTI as a passive ETF fund. 

Finally, the last option to exercise for retirement is to find the kind of work you’d enjoy doing even if you’re retired. Whatever it might be, if it earns you money, it’s income you can enjoy when retired which is as valuable as any investment or savings you might have.