Employer-sponsored retirement plans are not mandated. They’re an added benefit to being on the job. As a result, there are instances where an employer may not offer one. And even those who do may have strict participation rules that create gaps in your savings plan or disqualify you altogether.
According to the Board of Governors of the Federal Reserve System, of full-time private sector workers, 25% were denied access to employer-sponsored retirement plans. In fact, studies indicate that access to workplace retirement plans is lower today than it was in the late 1980s.
Often we get so tied up with our careers that we forget that the reason we’re working in the first place is to support ourselves — now and into retirement. But don’t let your career focus derail your retirement. Here is what you can do if your employer doesn’t offer a retirement plan.
1. Seek an Employer Who Does
If you’re putting your retirement first, it is not unreasonable to think about taking your skillset elsewhere, especially if the new employer matches 401K contributions. Even the standard 3% employer match, on say $60,000, would yield an extra $1,800 in free money per year. On the other hand, let’s assume that you receive a generous year-end bonus, but no retirement offering. In this scenario you might be better off staying at your current job and following my next piece of advice — unless of course, you can find a position that offers you both, which many do.
There are many variables to consider when deciding whether to leave or stay with an employer. Be willing to design your own retirement plan and don’t be afraid to see what’s out there. Fear and/or complacency will only hold you back.
2. Start an Individual Retirement Account, or IRA
The best alternative to employer-sponsored retirement accounts are IRAs. In fact, these are nice to have in addition to employer plans, and are in some ways more advantageous than 401K accounts because they offer greater investment flexibility. There are two types of IRAs: Traditional and Roth, though they each have distinctive differences that need to be taken into consideration.
Traditional IRAs are funded with pre-tax income. Additionally, Traditional IRA contributions are tax deductible (depending on your adjusted gross income), however, distributions are taxed at withdrawal and cannot be taken before age 59 1/2 without incurring income tax and a 10% early-distribution penalty. All contributions must cease at age 70 1/2 and mandatory withdrawals have to be made by April 1st of that year.
The Roth IRA is a less complicated option because it is funded using after-tax dollars, which allows your earnings to grow tax-free. Distributions from your contributed funds can be taken at anytime without penalty, assuming the account has been open at least five years. And unlike the Traditional IRA, there are no mandatory distribution rules, so you can make contributions for the rest of your life, if you’d like.
Individuals can maintain one or both types of accounts. The current annual contribution limit for all IRA accounts combined is $5,500 ($6,500 for ages 50+). Learn more about the benefits of IRA accounts from How to Set Up an IRA to Build Wealth and 4 Reasons Why a Roth IRA May Be Better Than Your 401(k) are two great articles that explain the benefits of IRA accounts.
Your choice of employer doesn’t have to stymie your retirement plans. Consider all the alternatives available to ensure a safe and comfortable financial future for your family.
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