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Saving for Retirement if You Don’t Have a 401(k)

Saving for Retirement if You Don’t Have a 401(k)

Al Waller: With the convenience of payroll deductions and employer matching contributions, workplace retirement plans such as 401(k)s and similar plans have proven to be the most effective way to promote retirement savings. However, millions of U.S. workers are not offered a plan by their employers.

Welcome back to ClearPath – Your Roadmap to Health & Wealth SM. I’m your host, Al Waller. Joining me is Catherine Collinson, founding CEO and president of nonprofit Transamerica Institute® and its Transamerica Center for Retirement® Studies to share insights and tips on how workers who don’t have access to a 401(k) can save in other types of tax-advantaged retirement accounts.

Before we get started – a reminder that we would love to hear from you and learn what topics you would like us to cover or give us feedback on this episode. Please drop me or Catherine a note at [email protected].

Catherine, let’s start by framing the magnitude of this issue. What can you tell us?

Catherine Collinson: Our most recent survey of workers of for-profit companies yielded striking findings when comparing workers who are offered a 401(k) or similar plan with those not offered retirement benefits. Specifically,

  • Almost nine in 10 workers (89%) who are offered a plan are saving for retirement compared with just 44% of workers without retirement benefits.
  • Looking at total household savings in retirement accounts, workers who are offered a plan have saved an estimated median of $85,000, and those without retirement benefits have saved just $10,000. That’s a whopping 8.5 times difference!!

Al Waller: Wow, these numbers are staggering. You’ve got my attention. What else did your survey find?

Catherine Collinson: As I’ve already noted, fewer than half of workers who are not offered retirement benefits are saving for retirement. Among the 44% who are saving, many are missing out on opportunities to save in tax-advantaged retirement accounts. For example, only 35% of them indicate they are saving in an Individual Retirement Account (IRA).

Al Waller: This seems like a perfect jumping off point to discuss and explain IRAs.

Catherine Collinson: Let’s do it … IRAs allow you to make tax-deferred investments to provide financial security when you retire. For workers not offered benefits by their employers, there are two types of IRAs to consider: Traditional IRAs and Roth IRAs.

The IRS defines a Traditional IRA as a tax-advantaged personal savings plan where contributions are typically tax deductible. The contributions you make may be fully or partially deductible, depending on your filing status and income.

Generally, amounts in your traditional IRA (including earnings and gains) are not taxed until you take a distribution (withdrawal). If you take a withdrawal before age 59½, you will pay ordinary income taxes on the amount and possibly a 10% penalty.

A Roth IRA is a tax-advantaged personal savings plan where contributions are not deductible, but qualified distributions (withdrawals) are tax-free for those age 59½ and older, whose accounts have been in place for at least five years. Before that age and time requirement is met, you can withdraw the contributions you made to your Roth IRA without taxes and or penalties; however, you may be subject to taxes and potential penalties on the account’s investment earnings. Important note: Roth IRAs are not available to higher income earners.

Al Waller: How much is someone allowed to save in a Traditional or Roth IRA?

Catherine Collinson: The IRS establishes annual contribution limits. For 2023, individuals can save up to $6,500 in a Traditional or Roth IRA – the limit is the same for both. For individuals aged 50 and older, you can make a catch-up contribution of up to $1,000 on top of the $6,500, which brings the total amount to $7,500. Catch-up contributions can be especially helpful for older individuals seeking to boost their savings before retirement.

Al Waller: What are some considerations for choosing between a Traditional or Roth IRA?

Catherine Collinson: It’s a matter of preference. For some people, a Traditional IRA may be more appealing because they can deduct contributions from their current income and lower their current tax bill. Down the road when they retire, of course, they will pay ordinary income taxes when taking withdrawals.

Regarding the Roth IRA, some people prefer to pay income taxes now, so they can take withdrawals in retirement tax-free. This can be especially appealing to younger savers because it allows them to grow their savings over a long-term time horizon with tax-free withdrawals in retirement. For savers of all ages, the Roth IRA also offers a greater level of predictability in tax planning for retirement.

Al Waller: How does someone go about opening an IRA?

Catherine Collinson: You can set up an IRA through a bank, credit union, brokerage firm, or other financial institution. It’s a good idea to comparison shop to learn about the investments, services, education, and guidance that is offered, as well as the account fees and expenses. Once you’ve made your decision, then it’s a matter of filling out the paperwork and funding the account.

Al Waller: One of the most compelling aspects of 401(k)s is the convenience of payroll deductions – the contributions are automatically deducted from each paycheck and deposited into the plan. In thinking about the need to fund IRAs, I’m concerned that people tend to get busy or procrastinate or forget.

Catherine Collinson: That’s an astute observation that behavioral economists have proven time and again. The good news for IRA savers is there’s a way to automate your savings. Simply start by estimating how much you intend to save for the year. For example, you want to save up to the $6,500 annual limit. Divide that number by 12 monthly payments – approximately $541.66 per month. Then set up a monthly automatic fund transfer from your checking account to your IRA in that amount.

There’s also another potential option. If your employer offers direct deposit of your paycheck to multiple accounts, you could direct a portion to the IRA and the remainder to your checking account.

In exploring these options, your IRA provider should be able to offer instructions and tips on how to accomplish this.

Al Waller: Thanks, Catherine, speaking of tips – would you mind sharing some of your insights regarding and the Saver's Credit?

Catherine Collinson: Yes. Individuals saving in an IRA may benefit from the Saver’s Credit, a tax credit for retirement savers who meet certain income and eligibility requirements. In a nutshell, the Saver’s Credit is a tax benefit above and beyond the other tax-advantages of IRAs that we’ve been discussing. For our listeners who are not yet familiar with the Saver’s Credit, check out our podcast episode on the topic.

Al Waller: What other tips can you share?

Catherine Collinson: In recent years, an additional tax-advantaged opportunity has been making its way to the forefront – Health Savings Accounts (HSAs). If you are enrolled in a high-deductible health insurance plan, you may be eligible to save in an HSA. These tax-advantaged accounts enable you to make tax-deductible contributions and tax-free withdrawals for qualified medical expenses. While most people use HSAs to cover current medical expenses, you can also allow the HSA to grow tax-free over the long term for use in retirement.

Once you turn 65, any withdrawals you make for medical expenses from an HSA will be tax-free, and any withdrawals for non-medical expenses will be taxed as ordinary income.

Al Waller: What other words of wisdom do you have to share with our listeners as we wrap up this episode?

Catherine Collinson: For workers not currently offered a 401(k) or similar plan, help is on the way. Recent legislation, the SECURE 2.0 Act of 2022, makes it easier and more affordable for employers to offer retirement benefits to their employees – and it imposes more stringent requirements for employers to extend retirement plan eligibility to their long-term part-time employees. Also, a growing number of states are implementing state-facilitated retirement savings programs to expand access.

In the meantime, if you’re not offered a plan, you can still save. On this podcast, we’ve focused on tax-advantaged retirement accounts, but there are other ways to save, too. Do your homework to learn more about your options and determine which approach is best to meet your needs. And always remember, it’s never too soon or too late to start saving.

Al Waller: Thanks, Catherine, for your insights and helpful tips.

ClearPath – Your Roadmap to Health & Wealth is brought to you by Transamerica Institute, a nonprofit private foundation dedicated to identifying, researching, and educating the public about health and wellness, employment, financial literacy, longevity, and retirement. You can find our weekly podcast on WYPR’s website and mobile app, wherever you get your podcasts, and at transamericainstitute.org/podcast.

 ClearPath – Your Roadmap to Health & Wealth is produced by the Transamerica Institute with assistance from WYPR.

I’m your host, Al Waller. Until our next episode, stay safe, be well, and thanks for listening.

The information provided here is for educational purposes only and should not be construed as insurance, securities, ERISA, tax, investment, legal, medical, or financial advice or guidance.

Al Waller is a long-time Baltimore native and employment expert with a 30-year career in leading and advising locally and globally based corporations on matters including: Talent Acquisition and Retention, Employee Relations, Training and Development.
Catherine Collinson is the founding president and CEO of nonprofit Transamerica Institute and its Transamerica Center for Retirement Studies, and she is a champion for Americans who are at risk of not achieving a financially secure retirement. With two decades of retirement industry-related experience, Catherine is a nationally recognized voice on workforce, aging, and retirement trends. She was named a 2018 Influencer in Aging by PBS’ Next Avenue. In 2016, she was honored with a Hero Award from Women’s Institute for a Secure Retirement (WISER) for her tireless efforts in helping improve retirement security among women.