So You Don’t Have a 401(k). Here’s Why You Shouldn’t Panic

There’s a reason why many savers jump at the chance to open a 401(k). Not only do these plans come with generous annual contribution limits, but many of the companies that sponsor them also offer matching incentives that could leave you with a lot of free money.

But not everyone has access to a 401(k) plan. Because these plans can be costly to administer, some smaller businesses are compelled to opt out of them.

If your employer doesn’t give you access to a 401(k), there’s no reason to assume your retirement is doomed. There’s another option you can look at for building a nest egg — and a solid one at that.

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An easy way to pivot

Last year, an estimated 28% of workers didn’t have a 401(k), according to recent data from the U.S. Bureau of Labor Statistics, so if you don’t have one, you’re in good company. And if that’s the case, it pays to look at opening an IRA.

IRAs actually offer one key benefit over 401(k)s — more investment choices. With a 401(k), you’re generally limited to a bunch of different funds that come with varying expense ratios, or fees. And those fees can get very expensive unless you stick with index funds, which are passively managed.

The upside of index funds is that they take the guesswork out of investing and offer solid returns at a low cost. But they don’t let you have a say in how you’re invested.

IRAs, on the other hand, don’t limit you to funds alone. Rather, you can invest your IRA in individual stocks and assemble a portfolio that has the capacity to outperform the broad market. That’s something index funds won’t let you do, since their goal is really to match the performance of their benchmarks, not outpace it.

Furthermore, while you might bemoan the fact that IRAs come with much lower contribution limits than 401(k)s, consider this: In 2020, only 12% of 401(k) holders contributed the maximum amount allowable that year, according to Vanguard.

Now this isn’t to say that more people didn’t contribute more than $6,000 to $7,000, which are the limits for IRAs today ($6,000 is the limit for workers under 50 and $7,000 is the limit for those 50 and older). The point, however, is that most savers don’t max out a 401(k) anyway.

And if you have cash to sock away for retirement beyond what IRAs allow for, there are other accounts you can open as well. You could invest some of your extra money in a health savings account if your health plan renders you eligible for one, or you could open a traditional brokerage account.

Don’t sweat it

While 401(k)s make retirement savings easy, they’re not your only option for building wealth for the future. If your work situation is such that you don’t have access to a 401(k), know that you can do quite well for yourself by funding an IRA and investing it strategically. And if you need to supplement with other long-term saving or investing accounts, so be it.

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