What if you can’t contribute to a 401(k)?

Pool waterPhoto courtesy of Riccardo Romano

In my previous post, I talked about what to do if you’re ineligible for contributing to a Roth IRA. This most commonly is due to having an income over the limit set for those contributions.

But just like you could be unable to contribute to a Roth IRA, you could also be unable to contribute to a 401(k).

What then?

Employer fails

Unlike a Roth IRA, there are no income limits on a 401(k). The biggest reason you can’t contribute to a 401(k) is because your employer doesn’t provide an option to do so.

Let’s not forget that a 401(k) (and its cousin the 403(b)) are an employer-sponsored retirement arrangement. You get money taken right out of your check, pre-tax, and put into an investment product.

It’s a no-brainer that a company would want to set this up. To me, it’s as obvious a perk as offering health insurance. And plus, there can be tax-advantages for the company too.

But that said, Santa doesn’t drop a 401(k) plan under the company’s tree, and so it can be some work to set it up. And because of that, some employers just don’t do it.

So the first step is to lobby your employer to set up a 401(k).

Going it alone

If your employer won’t help you, you’ve got to go it alone.

If you haven’t already, set up a Roth IRA, and contribute the maximum you can to it. This isn’t a pre-tax option, but the contributions grow tax-free and can be withdrawn tax-free.

The problem here is that the contribution limits are much lower for an IRA than a 401(k). At the time of writing, the contribution limit for a 401(k) is $18,000-$24,000, depending on your age, while the contribution limit for an IRA is only $5,500-$6,500. That’s a big difference.

And, as we’ve seen, if you earn a high income, you’re not allowed in the Roth IRA swimming pool.

If that were the case, you could still contribute to a Traditional IRA, but that could lead to double taxation if you were over the limit for a Roth IRA (no tax deduction upon contribution, plus taxation upon withdrawal).

Unfortunately, there aren’t a whole lot of options that I see to contribute a lot of money to a retirement account if your employer doesn’t offer one. (Self-employed folks are a different story.)

If you’ve maxed out your IRA contributions and you still have money to invest, you could open a brokerage account. This isn’t a retirement account, so it’s not tax-advantaged, but it does allow you to participate in the market by purchasing mutual funds and the like. You would need to pay capital gains taxes on withdrawal, but it’s still something.

If that doesn’t sound so great, do you own a home and have a mortgage? You could take that extra money and plow it into your mortgage. You’d be “making” the equivalent of your interest rate, which probably isn’t very high these days, but is still a guaranteed rate.

Come on, employers, step it up

I have to admit that I’m disappointed that there aren’t better options for investing for retirement if your employer doesn’t offer a 401(k) option. An IRA is great, but if you’re trying to invest 15% of your income in retirement (which is a good round number to use) you’ll max out your contributions really fast.

But this is all I’ve been able to find.

Personally, I’d be lobbying my company to set up that 401(k) plan.

Do you have other ideas on how to invest without a 401(k)? I’d love to hear about them in the comments below.

Mike Pumphrey

Mike Pumphrey

I'm the founder and author of Unlikely Radical, a site to help people succeed with money, achieve their goals, and live intentionally.

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Mike Pumphrey
Posted on August 24, 2017