Key Points

• Over 66 million unemployed workers no longer have access to a 401k
• There are still good investing options for those without jobs or who are self-employed, including a Traditional IRA, ROTH IRA, SEP IRA, and a solo 401k

Since the early days of COVID, the United States has seen a mass exodus in the workforce, with more than 66 million workers “separating” from their jobs since July 2020..  And because more and more people are choosing not to return to formal employment, it also means an increase in those without the opportunity to engage in the most popular form of retirement investing; the company-sponsored 401k.

With historically poor performance this could be a blessing in disguise for the individual investor, as there are a handful of investing options with the potential for better and safer returns than the traditional 401k.  If you are one of the millions holding off on finding a new company or have ventured into the realm of self-employment, below are some great options for retirement planning that don’t require a company sponsor.

1. IRA

An Individual Retirement Account, or IRA, is one of the best options for the self or not-employed, but who have even a small amount of cash to invest on a regular basis. There are a few types of IRA’s but two of our favorites are the Traditional and Roth IRA’s.

With a Traditional IRA your contributions are not taxed upfront, giving you a bit more money to invest and grow.  The tax liability then is incurred when you withdraw the money. 

The Roth IRA handles taxes in the opposite manner; you pay taxes on your contributions now, but draw that money tax-free once you hit retirement.  If you have chosen to start your own business, the ROTH IRA may offer a slight advantage.  If you’re not making much money now, your tax liability is likely lower than it might be in the future, once your business takes off you’re making money hand over fist.

Both limit annual contributions to just $6,000 per year ($7,000 if you are 50 or older), but if you have a 401k from a former employer you can roll the entire amount with no fees or additional taxation.

IRA’s are easy to set up and unlike company sponsored 401k’s who are managed by someone other than you, IRA’s are uniquely and solely yours.  We at DYF like that “uniquely and solely yours” part because we believe you are the best guardian of your money.  It is also our mission to empower the individual with solid, consistent, and profitable investing strategies. 

2. Solo 401k

Because of historically poor performance and high maintenance fees we typically steer people away from 401k’s.  But in the spirit of education and finding the best ways to meet the needs of all those who find themselves without a company sponsored retirement fund, we explore the Solo 401k.

This account might make a little more sense for someone who is self-employed, has no employees (excepting a spouse) and can be more aggressive with contributions.

With this type of account, with you as both the employer and the employee, you can contribute up to $58,000 per year. As mentioned, you cannot have any employees with this type of account, but you are allowed to hire your spouse, who can then also make contributions. 

Something to keep in mind is that contribution limits apply to the person and are cumulative, so if you or a contributing spouse are making contributions to another 401k, the max between both of them is still $58,000 per year.

Contributions are handled just like a company-sponsored 401k, meaning deposits are from pre-tax funds, but you’ll pay taxes on the money you withdraw in retirement. Once your account reaches $250,000 you’ll need to file paperwork with the IRS, something you need not do with IRA’s.

3. SEP IRA

Our final suggestion for those who have given the proverbial finger to a big company or corporation and are heading out on your own is the SEP IRA.  If you have a small company with no or just a few employees, this account might be a good way to go.

With this account you may contribute either $58,000 per year or up to 25% of your net self-employment earnings (limit of $290,000 per year), whichever is less.

Your tax liability is on the contributions, and you must contribute an equal percentage of salary for each employee.  So if you make a 10% annual contribution for yourself, you must also make a 10% annual contribution for each of your other employees.  Unlike a 401k though, you are not required to make annual contributions.  When you do though, they must be equal percentages for you and everyone you employ.

The fact that you no longer live under the umbrella of a major company does not mean you forego the privilege of an investment account.  At DYF Investing we believe preparing for the future and creating financial security should be available to everyone.  Even with limited funds and resources, now is still the time to invest. With just a little knowledge and understanding, you can find an account that meets your unique needs.