Saving for Retirement Without an Employer-Sponsored 401(k)

This post is intended for readers in the United States.

There are ways to save money for your retirement when you don’t have access to an employer-sponsored 401(k). Let’s take a look at a few of the most popular.

Traditional IRA

The Traditional IRA was the first individual retirement plan which came into existence when the Employee Retirement Income Security Act of 1974 was passed by Congress. The purpose of these plans was to allow a worker, who was not covered by a pension or 401k plan, to accumulate tax-advantaged savings for retirement.

The purpose of a Traditional IRA is to permit you to:

  • Make contributions to a saving account, or mutual fund or brokerage account, and take a current tax deduction for the amount of contribution.

Since you get a tax deduction, the IRS wants to make sure that you are using this plan for retirement saving, and not as a place to stash tax-deferred assets. So, there are some rules and limitations.

Eligibility Rules

There are only two rules which determine if you are eligible to open a Traditional IRA.

  • The first rule is that you must be under age 70 ½ at the end of the year in which you make a contribution.
  • The second rule is that you receive some form of earned income. This income can be from salary, commissions, or any form of payment that you receive from performing work. Earned income does not include interest income, dividends or any other passive type of payment.

Earned Income Limits

Once you have determined if you are eligible to open an IRA, then you need to look at the income limits to determine if you can actually make a tax-deductible contribution.

If you do not satisfy these limits, you can still make a contribution, but you cannot take a tax deduction for that amount of your contribution(s).

You also have an issue if you are covered under another pension, profit sharing or 401k plan. If you are, then you must satisfy a different and lower set of income limits.

See IRS rules for details.

Contribution Limits

The 2021 annual contribution limit for a traditional IRA is $6,000 or $7,000 if you are age 50 or older. You cannot contribute more than your actual compensation.

These limits also apply to both spouses together. Each spouse could open his or her own IRA, but the total of the contributions cannot exceed the limits shown above.

Traditional IRA Withdrawals

You can make withdrawals without penalty after you reach age 59 ½. But you will have to pay ordinary income tax on the amount withdrawn, including your own contributions. This is because you took a tax deduction for your contributions when they were deposited.

If you make a withdrawal before age 59 ½, the IRS imposes a 10% penalty on the amount you take out, unless you an exception applies. These exceptions are the taking of a withdrawal due to death, disability, and certain education expenses.

You are required to start taking minimum withdrawals once you reach age 70 ½. If you do not start minimum withdrawals by this age, the IRS will hit you with a 50% additional penalty on the amounts not withdrawn. This is one of the stiffest penalties found in the tax law, and is intended to stop taxpayers from extending their tax deferrals indefinitely.

Roth IRA

A Roth IRA is an individual retirement account (IRA) that allows qualified withdrawals on a tax-free basis provided certain conditions are satisfied.

Roth IRAs are similar to traditional IRAs, with the biggest distinction between the two being how they’re taxed.

  • Roth IRAs are funded with after-tax dollars; the contributions are not tax-deductible.
  • But once you start withdrawing funds, the money is tax-free.

Roth IRAs are best if you think your taxes will be higher in your retirement years than they are today.

Earned Income Limits

You can’t contribute to a Roth IRA if you earn too much money. In 2021, the limit for singles is $140,000. For married couples, the limit is $208,000.

Contribution Limits

In 2021, the contribution limit is $6,000 a year unless you are age 50 or older—in which case, you can deposit up to $7,000.

Roth IRA Withdrawals (Qualified)

At any time, you may withdraw contributions from your Roth IRA, both tax- and penalty-free. If you take out only an amount equal to the sum you’ve put in, the distribution is not considered taxable income and is not subject to penalty, regardless of your age or how long it has been in the account. In IRS-speak, this is known as a qualified distribution.

However, there’s a catch when it comes to withdrawing account earnings—any returns the account has generated. For distribution of account earnings to be qualified, it must occur at least five years after the Roth IRA owner established and funded his/her first Roth IRA, and the distribution must occur under at least one of the following conditions:

  • The Roth IRA holder is at least age 59½ when the distribution occurs.
  • The distributed assets are used toward the purchase—or to build or rebuild—a first home for the Roth IRA holder or a qualified family member (the IRA owner’s spouse, a child of the IRA owner and/or of the IRA owner’s spouse, a grandchild of the IRA owner and/or of their spouse, a parent or other ancestor of the IRA owner and/or of their spouse). This is limited to $10,000 per lifetime.
  • The distribution occurs after the Roth IRA holder becomes disabled.
  • The assets are distributed to the beneficiary of the Roth IRA holder after the Roth IRA holder’s death.

The 5-Year Rule

Withdrawal of earnings may be subject to taxes and/or a 10% penalty, depending on your age and whether you’ve met the 5-year rule. Here’s a quick summary.

If you meet the 5-year rule:

  • Under 59½: Earnings are subject to taxes and penalties. You may be able to avoid taxes and penalties if you use the money for a first-time home purchase (a $10,000-lifetime limit applies), if you have a permanent disability, or if you pass away (and your beneficiary takes the distribution). 
  • Age 59½ and older: No taxes or penalties. 

If you do not meet the 5-year rule:

  • Under 59½: Earnings are subject to taxes and penalties. You may be able to avoid the penalty (but not the taxes) if you use the money for a first-time home purchase (a $10,000-lifetime limit applies), qualified education expenses, unreimbursed medical expenses, if you have a permanent disability, or if you pass away (and your beneficiary takes the distribution). 
  • 59½ and older: Earnings are subject to taxes but not penalties.

Roth IRA Withdrawals (Non-Qualified)

A withdrawal of earnings that do not meet the above requirements is considered a non-qualified distribution and may be subject to income tax and/or a 10% early distribution penalty. There may be exceptions, however, if the funds are used:

  • For unreimbursed medical expenses. If the distribution is used to pay unreimbursed medical expenses for amounts that exceed 10% of the individual’s adjusted gross income (AGI) for the year of the distribution.
  • To pay medical insurance. If the individual has lost his or her job.
  • For qualified higher-education expenses. If the distribution goes toward qualified higher-education expenses of the Roth IRA owner and/or his or her dependents. These qualified education expenses are tuition, fees, books, supplies, and equipment required for the enrollment or attendance of a student at an eligible educational institution and must be used in the year of the withdrawal.
  • For childbirth or adoption expenses. Up to $5,000, if made within one year of the event.

There is yet another loophole for earnings: If you withdraw only the amount of your contributions made within the current tax year—including any earnings on those contributions—they are treated as if they were never made. If you contribute $5,000 in the current year and those funds generate $500 in earnings, you can withdraw the full $5,500 tax-free and penalty-free if the distribution is taken before your tax filing due date.

Taxable Investment/Savings Account(s)

You don’t need a tax-advantaged retirement account to set money aside for the future. It’s possible for anyone to open a taxable investment account and begin growing a portfolio.

A taxable investment account offers fewer tax advantages than a retirement account. However, you don’t have to worry about early withdrawal penalties and other restrictions to accessing your money when you need it.

Solo 401(k)

Self-employed workers often have a lot more freedom than their traditionally employed counterparts, but they face specific challenges. One of the biggest is the lack of an employer-sponsored retirement account.

When you’re self-employed, the burden of saving enough rests entirely on your shoulders, but a solo 401(k) can make meeting that challenge easier. It’s similar to an employer-sponsored 401(k), but it’s specifically designed for the self-employed. Here’s what you need to know about it.

Benefits of a Solo 401(k)

The important advantage of a solo 401(k) is the opportunity to choose the type of plan and the investment options that work best for you. Traditionally employed workers are limited to what their company offers, which might not be what’s best for you. When you’re the boss, you select how you’re going to invest your funds based on your risk tolerance. You also get to decide which type of 401(k) provides you the best tax advantages.

Solo 401(k)s come in two varieties: traditional and Roth. Traditional solo 401(k)s are tax-deferred. You make contributions with pre-tax dollars, and these reduce your taxable income for the year. But then you must pay taxes on your solo 401(k) distributions in retirement. It’s a smart play for those who think they’re earning more money right now than they’ll be spending annually in retirement. Delaying taxes until your income is lower will help you hold on to more of your hard-earned money.

Roth solo 401(k)s work the other way. You pay taxes on your contributions this year, but the money grows tax-free afterward. When you withdraw the funds in retirement, you get to keep it all for yourself. This is a better choice for those who think they’re earning about the same as or less than what they expect to spend annually in retirement. In this case, paying taxes now will cost you a smaller percentage of your income than waiting.

In exchange for these tax benefits, the government usually doesn’t allow you to withdraw your solo 401(k) funds before 59 1/2, unless you use the money for a qualifying exception, like a first-home purchase or a large medical expense. You can withdraw Roth solo 401(k) contributions at any time, however, as long as you’ve had the account for at least five years. Withdrawing money without a qualifying reason before 59 1/2, on the other hand, results in a 10% early withdrawal penalty.

Contribution Limits for a Solo 401(k)

For 2021, self-employed workers may contribute up to $58,000 to a solo 401(k), or $64,500 if 50 or older. This is a lot higher than what traditional employees can contribute to a 401(k) because self-employed workers can make employer contributions as well.

The employee contribution is $19,500 in 2021 or $26,000 if you’re 50 or older. This is the same amount traditionally employed workers are allowed to contribute to their 401(k)s.

The employer contribution is up to 25% of your net self-employment income, which is defined as all your self-employment earnings minus business expenses, half your self-employment tax, and money you contributed to your solo 401(k) for your employee contribution. For example, if you earned $100,000 in net self-employment income, you could make an employer contribution of up to $25,000 to your solo 401(k).

Your maximum contribution is the lesser of the annual contribution limit, discussed above, or your employee contribution plus 25% of your net self-employment income. So you cannot contribute more than $58,000 in 2021, even if your employer contribution would allow for it, and you cannot exceed your maximum employee and employer contributions for the year, even if you haven’t hit the annual limit.


A SEP IRA stands for Simplified Employer Pension Individual Retirement Account plan, or SEP in short form. This type of plan was created for small business owners and self-employed workers.

These plans were established to allow the small business owner or self-employed worker to set up an easy way to have a retirement plan without all the paperwork and various contribution thresholds found in qualified pension and 401(k) plans.

Qualified retirement plans are designed for larger employers who have more than 100 employees. The paperwork and accounting requirements for these plans is enough to discourage a small employer from setting up a retirement plan. The SEP solves that problem by making the reporting requirements very simple and not overly burdensome. In fact, normally the custodian you choose for the individual accounts will do the paperwork for you and each covered employee.

How a SEP Works

The SEP works like a group of Traditional IRA’s. Each eligible employee opens a SEP IRA for himself at an institution of his choosing. You, as employer put annual contributions into each employee’s account. Your employees make no contributions into the account. Thereafter, the employee has full control over the account, including what investments will be made with the money.

All employees must receive the same percentage of income into their accounts. You cannot give one employee a contribution of 1% of income, and another employee 3% of income. These amounts are always 100% vested, meaning the employees cannot forfeit any amount for any reason.

You also open an account for yourself, as an employee, and make the same contribution percentage into your own account.

You do not have to make the same contribution each year. You can decide at the end of each year how much to contribute to all the accounts, as long as all eligible employees receive the same percentage of income.

All contributions made by you, as the employer, are tax-deductible.

Eligible Employees

Employers must include employees if they meet the following three requirements:

  1. Be 21+ years old
  2. Have at least three years of service out of the last five years
  3. Have earned at least $450 in compensation from your employer for the year.

Contribution Limits

The IRS increased 2021 contribution limits for self-employed persons who contribute to a SEP IRA to $58,000.

SEP IRA Withdrawals

The withdrawal rules are the same as under a Traditional IRA. You or your employees can take out money at any time. The withdrawal is taxable as ordinary income to the employee since none of the assets have been taxed yet.

If you make the withdrawal before age 59 ½, an additional 10% penalty is imposed on the amount withdrawn, unless you come under one of the exceptions.

The 10% penalty will not be imposed if it is done due to one of the following reasons:

  • Medical Expenses – The penalty won’t be imposed if your uninsured medical expenses are over 7.5% of your adjusted gross income.
  • Medical Insurance premiums – If you lose your job at work, receive unemployment payments, and buy medical insurance for your family, the penalty won’t apply.
  • Disability – The penalty won not apply if you can’t do any work due to physical or mental problems.
  • IRA Beneficiaries – If you should die before 59 1/2, your IRA can be taken out by your beneficiaries without penalty.
  • Education Expenses – If you pay the cost of higher education during the year, the withdrawal will not be subject to the 10% tax penalty.
  • First Time Homeowner – You can take an early withdrawal from an IRA to purchase, or build your first home. The withdrawals are limited to $10,000.
  • Rollover to another Qualified Plan – If your withdrawal is rolled into another qualifying IRA, then it is not subject to the 10% early withdrawal penalty.
  • Annuity withdrawals – the penalty won’t apply if your withdrawals are made as part of a series of equal payments. The payments must be made over at least the later of 5 years or age 59 ½.


A SIMPLE (Savings Incentive Match Plan for Employees) IRA is a retirement plan that allows employees of small businesses to make tax-deferred contributions to the plan.

Who Can Participate

Self-employed individuals, small-business owners, and any business with 100 or fewer employees that doesn’t have another type of retirement plan.

Employer Contribution Limits

Option 1
Dollar-for-dollar match of employee contributions up to 3% of each employee’s compensation (which can be reduced to as low as 1% in any 2 out of 5 years).

Option 2
Contribute 2% of each employee’s compensation. Maximum compensation used to determine this contribution is $290,000 for the 2021 tax year.

Contributions are tax-deductible and are required every year.

As shown, there are several retirement plan choices if you do not have access to an employer-sponsored 401(k) retirement plan.

This post is for informational purposes only. It is not intended to provide financial advice or any recommendations.

Consult your financial advisor or broker for more information and to help you select the retirement plan that is best for you based on your circumstances and goals.

Creative Commons License
This work is licensed under a Creative Commons
Attribution 4.0 International License.

Published by W. M. Brown

I am a retired U.S. expat living in Ecuador. I was a business owner for 32 years before retiring in 2012.

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