If an employer does not offer a retirement plan, what might be another way to save for retirement?

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Do you ever find yourself daydreaming about the day you get to walk out the door of your employer and begin to enjoy retiring, enjoying peace of mind, and living life on your own terms?

Or switching the “Open For Business” sign-off for the very last time if you own and operate your own company?

No doubt those can make for great daydreams, but unless you are independently wealthy or are certain you are going to receive a huge inheritance, they aren’t likely to play out. Not unless you have a well-crafted retirement plan in place already and are diligently saving to make those dreams a future reality.

For many, doing so will necessarily involve taking advantage of an employer-sponsored retirement savings plan. Examples include:

  • Defined contribution plan – 401(k), 403(b) or 457(b)
  • Defined benefit plan – pension

But what happens if your employer doesn’t offer one? Or if for whatever reason you don’t want to, or aren’t eligible, to participate in such a plan?

A Better Mousetrap…For Some

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The good news is there is an alternative. A retirement vehicle that comes in a variety of flavors and that offers some tremendous benefits that can help you potentially fulfill your retirement dreams – an individual retirement account or IRA.

Let’s take a look at five of the most common IRAs and review the benefits, restrictions, and appropriateness for given situations:

  • Traditional
  • Spousal
  • Roth
  • SEP
  • Self-directed (SDIRA)

Retirement Misperception

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Before getting started, it probably makes sense to address a common misperception regarding retirement savings.

Safe to say that many in the U.S., and even the media, have a perception that the typical person has a retirement plan through their employer. And that employer-sponsored plans are the primary (if not only) form of retirement savings vehicle for the vast majority of Americans.

Well, that is actually not true. For wage and salary workers in the U.S., nearly half lack the coverage of an employer-sponsored retirement plan. This includes defined contribution plans like a 401(k), or a defined benefit plan, such as a pension, according to economist John Sabelhaus of the Wharton School of the University of Pennsylvania.

Not Covered, What’s Your Best Bet?

That’s actually pretty astounding if you think about it. And even worse if you are among the nearly half who aren’t covered.

Which begs the question – what can you do if not covered?

An IRA may be the solution you need to address your retirement needs.

Comes in Many Flavors

When it comes to retirement savings for many Americans, whether to supplement a plan offered by an employer or for those who don’t have or aren’t eligible to participate, an Individual Retirement Account or IRA is often a great choice.

That said, you need to be aware there is more than just one type from which to select. In fact, there are a number of different types that tend to cater to an array of scenarios. For now, we are going to focus on five IRA types in particular that are worth considering for the average person.

Primary IRA Options

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Determining and utilizing the right type of IRA, or a combination can enable you to maximize your savings no matter your employment, tax and life scenario, ranging from age, employment situation (switched jobs, self-employed, side jobs, etc), marital status, past savings efforts, and more.

Traditional IRA

The first choice for most people seeking to create tax-deferred retirement savings when they can’t, or don’t, contribute through an employer-sponsored plan is the Traditional IRA. You can even use them in addition to having an employer-sponsored plan.

The good news is they are offered everywhere and can be set up quickly and easily, so you can start right away, which is critical in saving for retirement. You can generally open an account online or by contacting an investment advisory or retirement planning firm, a brokerage house, or your local bank or credit union.

Where you choose is important because your investment options will be limited to what’s offered by that particular account provider. Generally, you will have the ability to invest in stocks, bonds, mutual funds, and even ETFs.

One of the key benefits of a Traditional IRA is the fact that your annual contribution can reduce your taxable income for that particular year. This effectively reduces the amount of income you report to the IRS, resulting in a lower amount of tax owed.

Equally important, the annual contribution, as well as the gains earned in the account, are tax-deferred, allowing you to take advantage of the financial concept of compound savings, which can fuel substantial growth over many years.

There is also an additional benefit in that that your savings won’t be taxed until you start to take distributions. When you retire your tax bracket will presumably be reduced given you are no longer receiving income from your employer or from your own business. Even if you continue to work part-time your tax bracket will likely be lower. A lower tax bracket can equate to fewer taxes owed.

The IRS does impose limits on the number of eligible contributions each year. For 2022 the maximum contribution is $6,000, plus you can contribute an extra $1,000 if you are over age 50, which is considered a catch-up contribution.

For 2023, the limit is $6,500, and $1,000 for an eligible catch-up contribution.

These limits do not apply to rollover contributions coming from a qualified retirement account, such as from a past employer-sponsored 401(k) plan.

If married you and your spouse can take advantage of individual contributions to separate accounts if both earn taxable income from an employer and/or if self-employed.

It’s important to keep in mind that contribution limits are affected by your filing status, adjusted gross income (AGI) for you and your spouse, the amount contributed to an employer-sponsored plan (if either you or a spouse have such a plan), and numerous other factors.

According to the IRS, there are also exceptions that can affect your annual contribution (single or married), such as divorce or separation, qualified disaster relief scenarios, care payments, and more. Fortunately, there is no longer an age limitation regarding contributions to Traditional and Roth IRAs.

When it comes to taking distributions out of your IRA, withdrawals are considered early and will incur a 10% penalty on top of the income tax due if taken before age 59 1/2, although there are some exceptions.

The IRS does require that you eventually start taking distributions and pay tax on the savings in your IRA, which are referred to as required minimum distributions (RMD). These must start at age 72, with certain exceptions.

Spousal IRA

The IRS normally requires that any person contributing to a Traditional IRA must have earned income in order to contribute to an account. But for couples where one spouse has no or limited income, their ability to save can be severely hampered. They would be restricted to one account, limiting their annual contributions and reducing their potential retirement savings over the long haul.

The Spousal IRA enables both to have separate IRAs, allowing them to potentially save considerably more for retirement.

The maximum contribution for a Spousal IRA is the same as a Traditional IRA, even if the spouse has no or limited income on their own. The combined contribution is limited for both the Traditional and Spousal accounts to the lesser of the couples’ combined income, or twice the annual contribution limit. And they can both make catch-up contributions if over the age of 50.

All other restrictions, limits, and benefits are exactly the same in a Spousal IRA as in a Traditional IRA.

A Spousal IRA can be funded from the earnings of either spouse, but it must be opened in the name and social security number of the non-working spouse.

Roth IRA

The Roth IRA is another great alternative retirement savings vehicle for individuals. Unlike the Traditional IRA, contributions are made using after-tax dollars.

While they don’t offer the benefit of an up-front tax break, the principal and gains earned in the account are completely tax-free once you start taking distributions, with few exceptions.

Just like the Traditional IRA, there are maximum annual contribution limits – they are the same. And there are additional limitations that might apply (reducing the amount you can contribute) that are based on your filing status and income.

If you want to convert savings from a Traditional IRA or a qualified employer-sponsored 401(k) or similar plan, you can do so via a Roth conversion strategy, but you will first have to pay the taxes owed on those accounts.

Remember that doing so might push you into a higher tax bracket, given this would increase your taxable income in the year the distribution occurs.

Such a transaction won’t be subject to the 59 1/2 premature distribution penalty on the funds actually deposited into the Roth IRA account. But you might be penalized for any portion of the distribution used for other purposes, including paying your taxes owed in that year.

The good news is the converted retirement savings will gain the aforementioned Roth IRA benefit of tax-free earnings thereafter.

There is a 5-year restriction to be aware of on withdrawals from a Roth IRA. Distributions taken before the five-year mark can be subject to a 10% penalty, and you might owe taxes that would be due for the earnings portion of the distribution, with some exceptions. The 5-year restriction period starts on January 1st of the year in which the Roth IRA was set up.

The 5-year restriction and penalties also hold true for a qualified conversion to a Roth IRA, as well as for distributions to account beneficiaries of a deceased Roth IRA holder.


If you are a sole proprietor you can take advantage of tax-deferred savings and a much higher annual contribution limit utilizing a simplified employee pension or SEP IRA. This is considered a type of Traditional IRA.

A SEP IRA gives you the ability to contribute at a much higher level than a Traditional IRA or other retirement plans. According to the IRS, you can do so at the lesser of 25% of your annual income or $61,000 in 2022 and $66,000 in 2023.

Catch-up contributions are not allowed, but otherwise, a SEP IRA works primarily the same and comes with many of the same benefits and limitations as a Traditional IRA. This includes tax-deferred savings and the ability to take advantage of compounding interest on the plus side, as well as early withdrawal penalties and RMD requirements on the not-so-good side.

Self-directed IRA

If you feel confident making your own investment decisions and want flexibility in terms of what you can purchase, a Self-directed IRA (SDIRA) may be your best bet.

These types of accounts work exactly the same as Traditional and Roth IRAs, with the same benefits, as well as limits on contribution, withdrawal, and eligibility, respectively, but they are controlled by you and allow a much broader range of eligible investments.

You have the ability to invest in traditional assets, such as individual stocks, bonds, ETFs, and mutual funds, but you can also own an array of less traditional assets. This can include assets such as limited partnerships, shares offered in a private placement, precious metals and commodities, tax lien certificates, real estate, and more. Basically, anything allowed by the trustee or custodian offering the Self-directed IRA account.

One of the major considerations to keep in mind is the fact you make the decisions, so you have to do your own research and due diligence. And there can be higher costs and fees associated with SDIRA accounts.

This type of account is definitely not well suited if you’re not comfortable doing your own homework and making what can be difficult investment decisions.

The Perfect Solution

Man shows gesture of a great idea

Achieving your retirement goals can seem like a pipe dream if you are among the large group (nearly half of working Americans) who aren’t covered by an employer-sponsored plan.

Fortunately, you aren’t out of luck. The right IRA (or combination) can offer the perfect solution enabling you to make your dreams come true. But it’s important to make the right decision when selecting an IRA based on your particular circumstances and situation.

To avoid issues and potential pitfalls or costly mistakes, if you don’t already, you should probably consider working with a retirement planner or investment advisor.

Call or visit our website to set up a free analysis of your current portfolio or to set up a meeting to learn more about IRAs and how they can be utilized to help reach your retirement goals.

Small Business Owner? A SEP IRA can benefit you and your employees

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If you are a small business owner and have employees, a SEP IRA might be your best bet when it comes to retirement savings.

Utilizing a SEP IRA in your workplace enables you the ability to offer a plan and contribute on behalf of your employees (they can’t contribute), all the while avoiding the setup and higher operating costs associated with pensions, 401(k), and other employer-sponsored plans.

As the employer, you’ll benefit from tax deductions that are eligible for contributions made for your employees.

And a SEP IRA gives you as the employer the ability to contribute at a much higher level than a Traditional IRA or other retirement vehicles. According to the IRS, you can do so at the lesser of 25% of your annual income or $61,000 in 2022 and $66,000 in 2023.

Catch-up contributions are not allowed, but otherwise, a SEP IRA comes with many of the same benefits and limitations as a Traditional IRA.

If you do set up a SEP IRA plan as an employer, be mindful that there are requirements involved that you must follow to avoid running afoul of the IRS. Two important requirements:

  • You as the employer must contribute equally (on a percentage basis of salary) to all of your eligible employees – you can’t contribute a higher percentage to your own account than that of your employees
  • Although your contributions can vary each year (ex. variances in revenues, cash flow, etc.), they must be equal on a percentage basis for all eligible workers, including yourself

Note: An alternative retirement vehicle is available if you operate your own company and have a limited number of employees – the Savings Incentive Match Plan for Employees or SIMPLE IRA.

This type of IRA retirement account allows much lower annual contributions and there is a 25% penalty, in addition to taxes due for withdrawals taken within two years of contribution…ouch.

As such, this is not a plan advised for the average sole proprietor or small business owner, given the higher contributions allowed in a SEP IRA.

Let Us Help You Achieve the Retirement You Deserve!

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