Retirement storage can be challenging. If you do not have access to certain types of retirement accounts, saving for the future may be even more difficult.
Approximately 31% of Americans do not have access to the Plan of Work Plan, such as a 401 (k), according to a Morning Consult and Funding Our Future survey. Furthermore, by those who do not have a pension account through the employer, three-quarters said they would cash in on that type of account if they had access to one.
A 401 (k) is one of the most powerful ways to save for retirement, especially if the employer offers similar contributions. But if you don't have a 401 (k), there are other options.
No. 401 (k)? No problem
Without access to 401 (k), your next best options are either a traditional IRA or a Roth IRA. A traditional IRA is very much like a 401 (k) in that the contributions are deductible in advance; then you pay income tax on your withdrawals when you retire. With a Roth IRA you pay tax when you first contribute to your account, but eligible withdrawals are tax-free.
A major difference between 401 (k) s and IRA is the contribution limits. In 2019, you can contribute up to $ 19,000 in a 401 (k). For those 50 and older, the annual limit increases to $ 25,000. However, with the IRA you are limited to only $ 6,000 per year, or $ 7,000 per year for those aged 50 and over. So if you are a power saver, an IRA can prevent how much you can contribute each year. But if storage in a 401 (k) is not an option, an IRA is certainly better than nothing.
That doesn't mean the IRA doesn't have its benefits. One advantage the IRA has over 401 (k) s is a wealth of investment options. With a 401 (k) you are limited to the small pool of investments chosen by your employer. But with an IRA, you have seemingly endless possibilities to suit your needs. Sometimes it may even play out in your favor to invest in an IRA rather than a 401 (k). If your 401 (k) pays high fees and you don't have the ability to lower them by investing in different funds, it can be a smart move to contribute to an IRA instead, so you can choose lower fees .  There is no rule that you cannot double by contributing to both a 401 (k) and an IRA. If you have a 401 (k), be sure to invest enough to earn some employer-matching contributions. After all, you'll never knock down the chance to make free money. So, if you find an IRA with lower fees or better investment options, you can choose to invest the rest of your money there. If you have a lot of money to invest and you have a maximum of your IRA, you can contribute the rest to 401 (k).
Traditional IRA vs Roth IRA
If you don't have a 401k or you decided that an IRA is a better option, the next step is to choose whether a traditional IRA or Roth IRA fits better.
For those who expect to be in a higher tax bracket in retirement, the IRA may be a better option. In that way, you pay tax in advance when you make the first contributions (when in a lower tax bracket), but you do not have to pay taxes on withdrawals (when in a higher tax bracket). If the opposite is true and you think you pay less in retirement than you do now, a traditional IRA can be your best bet because you get the pre-deduction now when you pay more in taxes.
A Roth IRA can also be beneficial if you know you are going to stretch every dollar in retirement. Not paying any income tax on your withdrawals means you have more disposable income to spend in retirement. While you are still being taxed on your contribution in the first place, it can be easier to pay those taxes when you are still working than when you are retired and living on a fixed income.
The age you are required to begin to withdraw your money is another important difference between traditional and Roth IRAs. With a traditional IRA, you need to start taking the required minimum benefits (RMDs) at age 70 1/2, whether you're ready to start pulling your money. That's because you haven't paid any taxes on your account yet, and Uncle Sam demands his bite. But with a Roth IRA, because you've already paid taxes on your contributions, you can keep the money in your account for the rest of your life if you choose.
This factor makes a difference if you expect to continue working into the 70's. Older Americans work longer than ever, with about 7 out of 10 baby boomers saying they expect to delay retirement to the last 65 years or never retire at all, according to a report by the Transamerica Center for Retirement Studies. If you plan to work earlier at age 70, it may be beneficial to leave your money in your account over the age of 70 until you are ready to withdraw it. But if you expect to retire earlier than 70 years, RMDs cannot make a difference to you.
Although a 401 (k) is one of the easiest and most effective ways to save for retirement, it doesn't mean you can't be afraid of the future if you don't have access to one. IRA are valuable investment options that sometimes have even more benefits than 401 (k) s, so be sure to explore your options and select the retirement account that best suits your needs.