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No 401(k)? Don't Use It as an Excuse to Neglect Your Retirement Savings

By Maurie Backman – Jun 28, 2020 at 3:18PM

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Workers without a 401(k) are less likely to sock away money for the future than those who have one. But the absence of a 401(k) should not be a barrier to savings.

There are plenty of good reasons to save for retirement in a 401(k) plan. For one thing, many employers that sponsor 401(k)s also match employee contributions to varying degrees, which means you may have an opportunity to snag free money for your senior years. Furthermore, 401(k) contributions are easy and seamless. You simply sign up to have a certain portion of each paycheck set aside for retirement purposes, and your payroll department makes that happen automatically so you don't have to think about it.

In fact, it's not surprising to learn that workers who are offered a 401(k) or a similar retirement savings plan through an employer are more likely to sock away money for the future than those without access to an employer plan, according to a recent Transamerica survey. But not having a 401(k) should by no means deter you from building a solid nest egg that will come in handy once your working years come to an end.

IRAs: a solid retirement savings tool

At first glance, IRAs may not seem as desirable as 401(k)s when it comes to retirement savings. After all, they don't allow for employer matches, and they also come with much lower annual contribution limits. Right now, IRAs max out at $6,000 a year for workers under 50, and $7,000 for those 50 and over. By contrast, this year's 401(k) contribution limits are $19,500 and $26,000, respectively.

Road sign that says IRA with right-pointing arrow underneath it

Image source: Getty Images.

But IRAs are still an extremely useful long-term savings tool. For one thing, they offer far more investment choices than 401(k). With the latter, you may be limited to a couple of dozen funds, some of which may come with exorbitant investment fees. With an IRA, you get lots more flexibility. You can buy mutual or index funds, but you can also choose to build a portfolio that consists of individual stocks. That gives you a lot more control over your investments.

Additionally, all IRAs come with a Roth savings option. Now if your income is too high, you'll be barred from contributing to a Roth IRA directly, but otherwise, there are plenty of benefits to going that route -- namely, getting to enjoy your withdrawals tax-free once you're retired. And while more and more 401(k) plans are starting to offer a Roth version, there are many plans that don't.

Finally, some IRAs offer an automatic savings feature that allows you to arrange for money to move directly from your checking account to your retirement plan on a consistent basis. That means you won't risk forgetting to fund your IRA, and you'll also remove the temptation to spend money that's earmarked for retirement.

While it often makes sense to participate in a 401(k) if that option is on the table, don't give up on retirement savings just because you don't have one. IRAs make it easy to save for the future, and you can open one through most banks or financial institutions. Funding one consistently is a good way to help ensure that you don't wind up cash-strapped when you're older.

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