W-2 worker with no employer 401(k) plan – What are your options?

We’ve been seeing a lot more of our clients and prospects taking jobs that they enjoy and are the right fit for them – but they don’t offer a 401(k) retirement savings plan. Having access to save via a 401(k), 401(a) or 403b is a nice perk and one of the fastest way to save a lot for retirement. But don’t worry, if you’re a W-2 worker without access to a retirement plan through your employer – you still have several options to save. Let’s explore your choices and discuss how much you should aim to save.

Retirement Savings Options for W-2 Workers Without a 401(k)

Individual Retirement Accounts (IRAs): The most accessible option for most W-2 workers is an Individual Retirement Account (IRA). There are two main types to consider:

1. Traditional IRA: Contributions are often tax-deductible, and your money grows tax-deferred until withdrawal in retirement. There is no income cap on being able to contribute to a traditional IRA.
   
   
2. Roth IRA: Contributions are made with after-tax dollars, but your money grows tax-free, and qualified withdrawals in retirement are also tax-free. Beware of the income caps for contributing to Roth IRAs. If you earn over the IRS stated limits, direct contributions to a Roth IRA will not be possible. In our previous blog, we provide a guide to your different Roth IRA contribution options.

For 2024, you can contribute up to $7,000 to an IRA ($8,000 if you’re 50 or older). This is much lower than the 401(k) contribution limit of $23,000 per employee ($30,500 if 50 or older), so you many want to consider saving additionally via one of these other options.

Health Savings Account (HSA): If you have a high-deductible health plan, an HSA offers triple tax advantages:

1. Tax-deductible contributions
2. Tax-free growth
3. Tax-free withdrawals for qualified medical expenses

After age 65, you can withdraw funds for non-medical expenses without penalty, though you’ll owe income tax on those withdrawals. In this case, it works just like a pre-tax 401(k) or a traditional IRA. You can read more about HSAs in our blog. Just like the IRA, HSAs also have lower contribution limits than a employer retirement account. For 2024 you can only save a max of $4,150 for a single individual or $8,300 for a family.

Taxable Investment Account (i.e. Brokerage account): While it doesn’t offer the same tax advantages, a regular brokerage account allows you to invest without contribution limits. You don’t get an immediate tax savings like a traditional IRA or pre-tax 401(k), but any gains earned are not taxed until you sell your investments. And then, they’re only taxed as capital gains, not income. Capital gains tax rates are much lower than ordinary income.

Taxable accounts also provide flexibility, as you can access them at any age without penalties. Want to retire before age 59 1/2? Having a healthy brokerage account balance will allow you to fund your early years of retirement, before you can access your 401(k) or IRAs. Want to have more control over your taxes in retirement? Pairing a brokerage account with a pre-tax retirement account allows you to determine where your “retirement income” is pulled from. Having this flexibility will allow you to somewhat control your tax bill.

How Much Should You Save for Retirement?

So you can’t save $23,000 or $30,500 if you’re over age 50 like you would in an employer plan, what’s the right amount to save? The “right” amount to save for retirement varies based on your circumstances, but here are some general guidelines:

1. Aim to save 10-15% of your income for retirement. This is across all your accounts.
2. If you’re starting late, you may need to save more – potentially 20% or more of your income.
3. Consider using the “4% rule” as a rough estimate. Multiply your desired annual retirement income by 25 to get a target savings goal. For example, if you want to spend $100,000 a year in retirement, you’ll need $2.5m saved or coming from a pension/social security.

It’s also important to consider in what type of accounts you’re using to save for retirement. Going back to taxes – if you save at least half in Roth (no tax) and/or brokerage accounts (capital gains tax), you’ll be thanking yourself later in life. So if you have a healthy pre-tax 401(k) balance from a previous job or a pension, considering saving more in a Roth or brokerage account.

Remember, these are just guidelines. Your specific needs may differ based on factors like your desired retirement lifestyle, how long you may live, and anticipated healthcare costs.

Tips for Maximizing Your Retirement Savings

Now that you know what your savings options are and how to determine what the “right” amount to save may be, how do you ensure success? It’s not enough to know “what” to do. Now you need a plan!

1. Start early: Time is your greatest asset when it comes to compound growth.
2. Automate your savings: Set up automatic transfers to your retirement or brokerage accounts. Mimic what your paycheck would look like if you DID have an employer retirement plan.
3. Increase contributions gradually: Get a raise or bonus? Boost your savings rate as your income grows.
4. Diversify your investments: Spread your risk across different asset classes (stocks, bonds, alternatives, real estate, private investments, and globally).
5. Get professional help: Consider working with a fee-only financial advisor to create a personalized retirement plan.

While not having a 401(k) might seem like a setback, you still have powerful tools at your disposal to build a secure retirement. By leveraging IRAs, HSAs, and taxable accounts, and consistently saving a significant portion of your income, you can work towards the retirement you want. Remember, the key is to start saving as soon as possible and to increase your contributions as your financial situation improves.

CAM Disclosure

M & A Consulting Group, LLC, doing business as CAM Investor Solutions is an SEC registered investment adviser. As a fee-only firm, we do not receive commissions nor sell any insurance products. We provide financial planning and investment information that we believe to be useful and accurate. However, there cannot be any guarantees. 

This blog has been provided solely for informational purposes and does not represent investment advice. Nor does it provide an opinion regarding fairness of any transaction. It does not constitute an offer, solicitation or a recommendation to buy or sell any particular security or instrument or to adopt any investment strategy.

Past performance is not a guarantee of future results. Diversification does not eliminate the risk of market loss. Tax planning and investment illustrations are provided for educational purposes and should not be considered tax advice or recommendations. Investors should seek additional advice from their financial advisor or tax professional.