401(k) Tips

How to Open a 401(k) Without an Employer?

How do you open a 401(k) account without an employer plan? Many companies don’t offer a 401(k). But there are many alternatives to save for retirement.

4 min read

The 401(k) retirement plan is the most common way in which Americans save for retirement. However, according to a study by the US Census Bureau, only 14% of US employers offer a 401(k) through their company. That still results in over 70% of Americans contributing to a 401(k) plan. But if you find yourself working for a company that doesn't offer a 401(k) plan, you might not know how to open a 401(k) without an employer plan.

If your company doesn’t offer a 401(k) plan or you are self-employed, you’ll need to join a separate financial institution. There you’ll be able to open a 401(k), IRA, or any other retirement plan you choose.

In addition to these alternatives to 401(k)s, you'll want to rollover your old 401(k)s to these accounts. Consolidating your 401(k)s will help keep your retirement properly managed and accounted for.

Why Employers May Not Offer a 401(k)

Facilitating a 401(k) plan can be expensive for a company. The IRS requires testing and reporting to ensure retirement plans keep up with regulations. As a result, many small businesses simply can't afford to administer a 401(k) plan.

If a company is brand new and trying to get off of the ground, they may not have the time to organize a retirement plan for their employees. Since bringing in an outside firm costs even more money, usually, small businesses don't have a 401(k) plan in place.

And because nearly a half of Americans work for small businesses, the amount of people left to their own means to save for retirement is significant.

What are the Alternatives to a 401(k)?

Luckily, there are a few options for those looking to save for retirement beyond an employer-sponsored 401(k).

Outside firms typically hold these investment accounts, but you'll have access to their entire menu of investment options such as mutual funds, index funds, ETFs, and even individual stocks.

Traditional IRA

Much like a 401(k), a traditional IRA is funded by pre-tax dollars. The savings and growth you'll see are tax-free.

However, when you start taking distributions during retirement, taxes will be applied to what you take out.

The downside to a traditional IRA is the amount you can contribute is much less than a 401(k). The IRS sets the limits for how much you can contribute to an IRA at $6,000 per year ($7,000 per year if you're 50 or older).

Roth IRA

A variation to the traditional IRA is the Roth IRA.

Roth IRAs function in much of the same way as a regular IRA account; however, contributions are made using after-tax dollars. Meaning when you put money into a Roth IRA, you'll use the money that makes into your bank account.

The primary benefit to a Roth IRA is when you take money out during retirement, it will be tax-free. Because you paid taxes on the money you put in during your working years, you've already met your tax requirement for the money that grew.

Roth IRAs follow the same $6,000/$7,000 contribution limits. Additionally, Roth IRAs are limited by how much you make. If you earn $125,000 or more per year as a single filer, you are ineligible to participate in a Roth IRA. Married couples who file jointly are capped at $198,000 per year with a gradual reduction until $208,000.

What if I'm Self-Employed?

Those who are self-employed, freelancers, and contractors can still participate in the above IRA options—given you earn less than the limit for Roth IRAs.

There are a few other retirement options available to those who don't have an employer to answer to.

Solo 401(k)

A Solo 401(k) operates in much the same ways as an employer-sponsored 401(k). The difference is you act as both the employee and the employer.

This distinction allows you to have much more control over your 401(k) than you would from an employer.

You can choose to contribute pre-tax dollars into a traditional Solo 401(k) or after-tax dollars into a Roth Solo 401(k). The typical tax implications apply to either option.

Another great feature of a Solo 401(k) is you can contribute your "employee" earnings to the account but also contribute as the "employer.” You can contribute the company's pre-tax revenues—up to a certain amount—into your Solo 401(k) account. There are contribution limits, but by double-dipping your contributions, you can put away even more for your retirement.

SEP IRA

Like a Traditional IRA, SEP IRAs (Simplified Employee Pension) contribute pre-tax earning and grow tax-deferred. Distributions during retirement are then taxed.

The significant difference is only the employer can contribute to an employee's SEP IRA. The IRS considers employees eligible for SEP IRAs as someone who is 21 years or older, has worked for the company for three of the past five years, and has made at least $600 during the year.

If you have other employees aside from yourself, you must contribute the same percentage of income to every employee. So if you commit to 15% of your income, you must contribute the same amount to every employee.

Contributions are limited to 25% of the employee's contribution or $58,000—whichever is less.

SIMPLE IRA

Reserved for small businesses with no more than 100 employees, a SIMPLE IRA can be another option if you're self-employed. They are usually less expensive to operate than a 401(k), making it more appealing as a business owner.

SIMPLE IRAs work in the same way as a traditional 401(k) plan a large employer would provide. Employees can elect a percentage of pre-tax dollars to contribute, and employers can match those contributions as well.

Contributions and growth are both tax-deferred to distributions made during retirement.

Like most retirement accounts, the IRS set limits on contributions. Employees under the age of 50 can contribute up to $13,500, with a catch-up bonus of $3,000 for those 50 and older.

Additionally, employers must put 2% in their employees' funds whether they contribute or not. If an employee does contribute to their SIMPLE IRA, the employer must contribute up to 3% of the employee's compensation.

When You Can't Open a 401(k) Without an Employer

To be eligible for most retirement accounts, you need to have earned income during that year. If you don't have an employer and received only unemployment income for the year, you won't be eligible to contribute to many of these retirement account options.

The one exception to this is the Roth IRA. If you have a significant amount of savings, you can contribute up to the limits set by the IRS.

However, if you are employed, and your employer doesn't offer a retirement plan, you can still participate in the Traditional and Roth IRAs.

Things to Consider

If you find yourself without an employer-provided 401(k) plan, don't let it prevent you from saving for your retirement. Look into these options to further your retirement contributions.

Additionally, find your olds 401(k)s and roll them over into your new account as well. Keeping your retirement accounts in view helps to maintain appropriate asset allocations. Contact your old 401(k)s administrator to learn how to facilitate the transfer of your funds.