How to Invest for Retirement Without a 401(k)

Individual retirement accounts generally offer more flexibility and options.

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About half of all U.S. households have access to a 401(k) at work. Lucky for them. But what should you do if you don't have access to a 401(k)? Is all hope of a secure retirement lost? Quite the contrary. You actually will have a bit more flexibility with your retirement savings options. But you will need to be a little more proactive in your efforts. There's no human resources department available to set it all up for you. Here is how to plan for retirement without a 401(k).

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Consider a traditional IRA. If your employer doesn’t provide a 401(k), then your first thought should probably be to set up a traditional IRA. A traditional IRA has the same tax structure as a traditional 401(k). The money you put into your traditional IRA will not be taxed until the money is withdrawn. For those within the qualifying income limits the annual contribution limit is $5,000. Those age 50 and over can contribute $6,000 in 2010.

SEP IRAs for the self-employed. Self-employed individuals should consider opening up a SEP IRA. This retirement account functions similarly to a traditional IRA, except the SEP IRA contribution limits are higher. For 2010, you can contribute 25 percent of your income annually or $49,000, whichever is smaller. If the $5,000 you're contributing to the traditional IRA isn't enough, then the SEP is the next logical step. Other self-employed plans to consider are the SIMPLE IRA and the Solo 401(k).

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Use a Roth IRA to add tax diversification. Traditional and SEP IRAs allow you to avoid taxes on current earnings and defer paying taxes on your investments until you retire. A Roth IRA has the opposite tax treatment. The Roth IRA uses after-tax contributions to fund the account. And, as long as you hold those funds until retirement, you'll never pay taxes on the money again. You can contribute up to $5,000 annually and $6,000 after age 50. This can be a great deal for retirement savers within the income limits.

A traditional IRA, SEP IRA, and Roth IRA can all be opened up at a mutual fund company, an online stock broker, or even at some banks. To make these IRA accounts as effective as a 401(k), make sure you setup automatic contributions from your paycheck to the account.

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Embrace your choices. When you aren't tied to a 401(k) account you will likely have more investment options for your portfolio. 401(k) plan administrators select the choices in an employer sponsored plan. You might have just 10 mutual funds to choose from and the expense ratios could be through the roof. With your own IRA you will have more freedom to potentially find investments that cost much less.

Overcome inertia. The hardest part about saving for retirement outside of a 401(k) is getting started. Once you open up your IRA account, pick some investments, and get the automatic contributions going, you're all set. Try not to let the complex language and multitude of choices trip you up or prevent you from doing anything. Get started with small automatic contributions and fine tune things as you go along. You'll be glad you got the ball rolling.

Phil Taylor is the author of the popular 52 Ways to Make Extra Money. Find out how to save more money and get the latest news on the best online savings accounts and the best online stock brokers at his blog, PT Money: Personal Finance.