I Don't Have a 401(k). This Is the Brokerage Account I'm Using to Invest for My Retirement
- Saving for retirement is important, and a 401(k) makes it easier to invest for the future.
- I don't have a 401(k) so I've decided to invest in another tax-advantaged account.
- A SEP IRA offers distinct advantages if you're self-employed.
Could this account be a good choice if you don't have access to a 401(k)?
A workplace 401(k) can simplify the process of saving for retirement. You get to take an upfront tax deduction for money you contribute to a 401(k) and you can arrange to have funds taken directly from your paychecks so you don't have to manually contribute to your account each month. Your employer may also match contributions you make to your 401(k).
Unfortunately, I don't have a workplace 401(k) because I am self-employed. But, that doesn't mean I'm not investing and getting tax breaks for doing so. I've just chosen to open a different type of tax-advantaged retirement account with a brokerage firm.
This is the account I'm using to invest for my retirement
Since I don't have a 401(k) at work, I've opened a SEP IRA with a brokerage firm instead. SEP IRA stands for Simplified Employee Pension Individual Retirement Arrangement. Only employers can contribute to it, but since I am my own employer, that means I can put money in and get tax breaks for doing so.
Specifically, I'm allowed to invest up to 25% of my annual compensation, up to an annual maximum of $61,000 in 2022. This enables me to invest considerably more than I could in a traditional or Roth IRA, which have a combined contribution limit of $6,000 this year. This money comes with an upfront tax deduction, just as a 401(k) does. There are also no income limits that prevent me from making deductible contributions to this account.
I've chosen a SEP IRA over Roth accounts because I'm paying a pretty high tax rate right now. Roth accounts allow you to defer your tax savings and make tax-free withdrawals as a senior, but you do not get an upfront tax deduction in the year you make the contribution. I think my tax rate is probably higher now than it will be at retirement, so I'd rather not defer my opportunity to save.
How to find the right broker for your retirement account
Since I opened my own SEP IRA, rather than relying on an employer to provide me with a retirement account, I was able to choose which brokerage firm to invest my money with.
Not all brokers allow you to open a SEP IRA, but many do. I had to narrow down my search for a brokerage firm to one that would allow me to use the kind of account I want. I also wanted to make sure my broker would not charge me fees for opening the account, and would not charge commissions to buy assets. And I wanted to be sure the trading platform was easy to use and that I could find plenty of commission-free ETFs to invest in.
If you are investing for your own retirement, whether you do that with a SEP IRA or just use a Roth or traditional IRA as a supplement to your workplace plan, it will be important to find the best broker to meet your needs. Consider the fees and services the brokerage firm offers so you can find the best account for you.
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