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Retirement Planning Without a 401(k): Tips for 40-Somethings


Retirement Planning Without a 401(k)

David J. Blount, CFP® LPL Financial Advisor


The last few years have seen a lot of growth in side jobs and freelance roles among people in their 40s. Many cherish these setups because they provide freedom and independence not possible with traditional roles. However, they also leave you without the option of an employer-sponsored retirement plan. The good news, though, is that there are several savings plans available when you’re retirement planning without a corporate 401(k).


Sole proprietors, freelancers, and small business owners might be able to take advantage of these options, many of which offer the same kind of tax-advantaged and tax-deferred growth as institutional 401(k)s. Learn more about the potential paths available to you when retirement planning without a 401(k). 


Traditional or Roth IRAs

Individuals who are retirement planning without a 401(k) can open an IRA for themselves. Both traditional and Roth IRAs offer savings plans with varied tax benefits. You can contribute up to $7,000 to an IRA in 2024 if you’re under 50, or up to $8,000 if you’re older.


Unlike employer-sponsored IRAs, you make all the investment decisions in your account. You can arrange automatic contributions and adjust your investments too. Of course, this also means being more hands-on with monitoring the account.


SEP IRA

A more structured independent business may prefer a simplified employee pension (SEP) plan. This is a strategy for sole proprietorships, partnerships, and C and S corporations seeking a flexible retirement savings option that’s easier to manage.


If you own a small business with employees, you can contribute up to 25% of your overall compensation to your individual SEP IRA, up to a maximum of $69,000 in 2024. Self-employed individuals’ contributions are typically limited to 20% of net income.


You can set up SEP accounts for any workers who qualify. However, only the employer can make contributions to their workers’ SEP plans, so you would have to fund your employees’ accounts up to the annual limits of traditional IRAs.


SEP IRAs are usually simple to set up. They’re also fairly low-maintenance, with little in the way of charges and no additional tax paperwork.


Self-Employed 401(k)

You may have heard these referred to as “solo 401(k)” or “individual only 401(k),” they are all different names for the same thing. These are 401(k) plans that have one participant, who is a self-employed individual, or that person and his or her spouse. These plans can be great alternatives to a SEP-IRA and SIMPLE IRA for the right business owners, such as freelancers, professors with side income, sales professionals, and other consultants. The compelling advantage of a self-employed 401(k) is that one can achieve more savings, tax deductions, and tax deferral due to higher savings limits on the same income when compared with other plans.  


For example, the chart below demonstrates this comparison for a 45-year-old self-employed business owner with $100,000 of net income.    


Retirement Planning Without a 401(k)


You can see that the self-employed 401(k) outperforms the other plans in this scenario. The main benefit of a self-employed 401(k) is that you have two funnels for contribution: one as the boss and the other as a worker. As an employer, you can contribute up to 25% of your annual eligible earnings before taxes to the fund. In addition, you can make a separate contribution to the fund as an employee—up to $69,000 a year if you’re still under 50 in 2024.


There are some considerations with self-employed 401(k) plans. After plan assets hit a value of $250,000, you must file a Form 5500 with the IRS. You have until the end of the given fiscal year to set up your solo 401(k) plan. Feel free to contact us here if you would like a retirement plan analysis like the one described above for you.


SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is another option for small businesses with a limited number of employees. Unlike a SEP IRA, however, employees can make contributions to their retirement accounts—up to 100% of their total compensation, to a limit of $19,500 in 2024.


As an employer, you have two options for contributing to your workers’ SIMPLE IRAs. You can make matching contributions to each employee of up to 3% or fixed contributions of 2% of an employee’s compensation, regardless of employee contributions.


True to its acronym, a SIMPLE IRA is easy to manage, cost-effective, and flexible for both employer and employee. It also incentivizes employees to participate in retirement planning without a 401(k).


Get Help on Retirement Planning Without a 401(k)

When approaching their golden years, 40-somethings have many options for maximizing their savings in retirement planning without a 401(k). Simply guessing which plan may benefit you most is not a good strategy as you may end up saving less, paying more in taxes, and accumulating less wealth. So, give us a call and we can help you discern the best potential plan for your personal financial circumstances. In addition to the plans outlined above, health savings accounts, annuities, or separate investment accounts can help manage wealth.


Investment & Insurance Planning Services, LLC, based in Oviedo, FL, can help 40-somethings find suitable retirement solutions. To schedule a complimentary call to discuss your current financial planning considerations or investment concerns and see if our services are a match for your needs, contact us today at service@davidblountIIPS.com or (407) 542-3249. You can also send us a message here.


About David

David Blount is President and CEO of Investment & Insurance Planning Services, LLC (IIPS), an independent and fee-based firm that helps clients establish their financial goals and creates custom financial plans to help them pursue those goals. They specialize in working with pre-retirees, individuals in a career transition, L3Harris engineers, and JetBlue pilots. David’s motivation comes from seeing his clients pursue their goals. He says, “It’s very rewarding to help people make successful transitions from one career to another, start a small business, or retire.”


David received his bachelor’s degree from Troy University, and before becoming a financial planner in 2000, he had a nine-year career in the United States Coast Guard. He obtained the CERTIFIED FINANCIAL PLANNER™ designation in 2007. He has served as the guest financial expert on Orange Television’s Adult Lifestyle Magazine Show and frequently provides financial and retirement planning workshops. Outside of work, he enjoys spending time with his wife, Michelle, their two kids, Ryan and Alana, their dog, Jack, and visiting with friends. An avid outdoorsman, he enjoys fishing, hiking, and exercising, and as a committed person of faith, he enjoys attending church and is passionate about helping people in his community. To learn more about David, connect with him on LinkedIn.


The opinions voiced in this article are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which strategies or investments may be suitable for you, consult the appropriate qualified professional prior to making a decision. 


Investment & Insurance Planning Services and LPL Financial do not offer tax advice or services. 


Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. 


A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.


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