How to Open a 401(k) Without an Employer

Oct 26, 2023 3 min read

According to the U.S. Bureau of Labor Statistics, in March 2022, 69 percent of private sector employees had access to an employer-provided retirement plan, while 92 percent of state and local government workers did. The most popular type of employer-sponsored retirement plan is the 401(k) plan, but what if your employer doesn’t offer one? Or if you work for yourself?  If you don’t have access to employer-sponsored 401(k)s, there are other options when planning for retirement, and they can be just as helpful and convenient.

If You’re Self Employed

Are you self-employed? Did you know you have many of the same options to save for retirement on a tax-deferred basis as employees participating in company plans? Here’s how to start a 401(k) on your own, plus other options for small business owners.

Open a 401(k) On Your Own

If you are self-employed and do not employ others you are actually eligible start a 401(k) plan for yourself as a solo participant. In this situation, you would be both the employee and the employer, meaning you can actually put more into the 401(k) yourself because you are the employer match! 

For example, as an employee, you can contribute up to a maximum of $22,500 per year ($30,000 if you’re 50 or older) in 2023. On top of that, you can contribute up to 25 percent of compensation as a business owner. In total, your combined annual contributions could be up to $66,000 (or $73,500 if you’re 50 or older). Contributions to a traditional solo 401(k) also let you significantly reduce your taxable income, helping you lower your tax bill.

Businesses with sole proprietor, partnership and limited liability corporation (LLC) ownership structures may participate in a solo 401(k) plan given they meet the eligibility requirements. Financial professionals can help you set up a solo 401(k). Make sure to plan to have an account open with some contributions by Dec. 31 of the year you intend to begin.

Create Your Own Pension

Simplified Employee Pension (SEP) plans can provide a significant source of income at retirement by allowing employers to set aside money in retirement accounts for themselves and their employees. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25 percent of each employee's pay, up to $66,000 for 2023.

Other Retirement Accounts to Consider

If you’re not a small business owner, that’s OK. There are other ways to save for retirement without a 401(k).

Fund a Traditional IRA

A traditional investment retirement account (IRA) is an account set up through a financial institution that allows an individual to save for retirement with tax-free growth. With an IRA you can do the following:

Contribute up to $6,500 annually ($7,500 if you’re age 50-plus).

• Have an IRA for both you and your spouse offering the opportunity to set aside as much as $13,000 in tax-deferred savings each year.

• Not pay any tax on dollars you invest or interest you earn until you withdraw money from the account.

One of the major perks of 401(k) plans is that the deposits are immediately taken out of your paycheck and set into the account, which prevents you from spending the money or having to take action to save. However, you can do this with an IRA, too. You can set up a direct deposit from your paycheck to an IRA or other type of investment account.

Another smart option for funding your IRA is to invest your tax refund. 

Open a Roth IRA

Roth IRAs are a great option. When comparing a traditional IRA and a Roth IRA, the contribution limits are the same, but they are taxed differently. Your contribution to a Roth IRA is with after-tax dollars. When you decide to withdraw the money after age 59.5, you can do so tax-free in retirement.

What’s even better? You could very well be in a higher tax bracket by the time you reach retirement than when you start at a young age. So, when you take your tax-free withdrawals from your Roth IRA, you’ll have saved money on taxes.

Invest in Mutual Funds and Annuities

Looking for ways to reach your retirement goals while diversifying your investment portfolio? Mutual funds can be a great, long-term investment vehicle to start making your financial goals a reality. With diversification, professional management and liquidity, investing in mutual funds may be a good way to put your money to work for you. 

Another option to consider is an annuity. It can be a good option for accumulating funds for retirement either as a funding vehicle for an IRA or non-qualified funds. Annuities are designed to pay a steady stream of income in your retirement, so when it comes to filling the gaps of your retirement income, an annuity may be able to help.

Talk to a Financial Professional

Your local Farm Bureau agent can help you understand what products would be the right fit for your situation and financial goals. 

Want to learn more?

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