If you’re an hourly worker, you likely don’t have an employer-sponsored retirement plan. You’re not alone: 35% of private sector employees over 22 work at companies without retirement plans — and those numbers get worse for younger employees. 41% of millennials don’t have employer-sponsored retirement plans.
A retirement account is the best way to save for the future and ensure that you can stop working. Retirement accounts have tons of advantages over, say, your bank’s savings account, like tax breaks and higher rates of return (meaning: you put money into the account and the money grows without you doing a thing).
Without employer-sponsored retirement plans, you might think you don’t have any options for future-planning. But that’s not true! There’s actually a whole suite of choices. Here, we broke down the four best retirement accounts for hourly workers: the Roth IRA, the traditional IRA, the SEP IRA, and the solo 401(k).
In this article:
- Roth IRAs for hourly workers
- Traditional IRAs for hourly workers
- SEP IRAs (if you’re self-employed)
- Solo 401(k)s (if you’re self-employed)
Retirement Funds Through Work: Traditional and Roth IRAs
Everything you need to know about Roth IRAs
A Roth IRA is a retirement account you can contribute to with after-tax dollars.
This means that you pay taxes on the money you put into your IRA, but if you withdraw your IRA fund after age 59 ½, you won’t pay any taxes on those withdrawals.
Who can contribute to a Roth IRA?
- If you’re filing alone (not as part of a married couple) your income must be less than $144,000 in 2022 to qualify for a Roth IRA.
- If you’re married and filing jointly with your spouse, your combined income must be less than $214,000 in 2022 to qualify for a Roth IRA.
How much can you contribute to a Roth IRA?
- Depending on your income, you can deposit up to $6,000 dollars per year to your Roth IRA, unless you’re 50 years old or older. Then you can contribute up to $7,000 per year. (See this chart to figure out your exact contribution limits.)
- Keep in mind that these limits apply across every IRA you have open, so if you have both a Roth IRA and a traditional IRA, your limit will still be $6,000 (or $7,000) in total.
- You can contribute monthly or annually — there are no monthly limits or requirements
When can I get my money from a Roth IRA?
For the most part, you need to wait until you’re 59 ½ to start withdrawing from your Roth IRA, but there are a few exceptions:
- You can take out $10,000 to buy your first home.
- You can use a withdrawal to pay for certain education expenses
- You can take out funds for certain birth- or adoption-related expenses
- You can make a withdrawal if you become disabled
- You can take out funds to pay for unreimbursed medical expenses or health insurance if you’re unemployed
- Once you hit 59 ½, you can take out money you’ve contributed and money you’ve earned without paying any penalties as long as your account has been open for at least five years. If your account has been open for less than five years, your withdrawal will be subject to taxes but not penalties.
Everything you need to know about traditional IRAs
A traditional IRA is a retirement account you can contribute to with pre-tax dollars.
This means you typically get a tax break on your contribution: You don’t pay taxes on any money you put into your traditional IRA. (So, if your income was $50,000 for the year and you contributed $5,000 to your traditional IRA, you’d only pay income taxes on $45,000.) A traditional IRA is tax-deferred, meaning that you’ll pay income taxes during retirement on the money you take out of your fund and will be taxed at your retirement-age tax rate.
Who can contribute to a traditional IRA?
- Unlike a Roth IRA, there are no income limits for traditional IRAs.
- There are some limits for the amount you can deduct from your taxable income — if your job does offer a retirement plan like a 401(k) (or, if your spouse’s workplace does if you’re married), there are deduction limits, which you can check out on the IRS website. If your workplace (and your spouse’s workplace, if you’re married) doesn’t offer any retirement plan — as is most common for hourly employees — there are no limits on your deduction.
- Because of a 2019 law, an employee of any age can set up and contribute to a traditional IRA.
How much can you contribute to a traditional IRA?
The same rules as Roth IRAs apply to traditional IRAs. Remember, these limits exist across all of your IRAs, so if you have both a traditional and a Roth, these totals apply to the sum of both accounts. You can’t contribute $6,000 to your Roth and $6,000 to your traditional — you can contribute $6,000 in total spread across both accounts.
When can I get my money from a traditional IRA?
You can start taking out money from your traditional IRA at age 59 ½, but you are required to start getting required minimum distributions when you hit 72. Remember, this will be taxed like it’s income.
If you take money out before you hit 59 ½, you’re looking at penalty fees in addition to taxes. (There are exceptions, like buying your first home, higher-education expenses for a child, medical insurance after job loss, and more.)
Should I do a Roth IRA or a traditional IRA?
There are a lot of considerations to take into account when you’re deciding between a Roth IRA or a traditional IRA. It will depend on your financial goals, your unique financial picture, and what you think your life will look like down the road.
A basic rule of thumb is that Roth IRAs make sense if you think you’ll be in a higher tax bracket at retirement than you’re at now. In that case, it’s better to pay the taxes now so that you’ll pay them at a lower rate. If your income is low right now or you’re on the younger side, a Roth IRA might be the best ticket for you.
On the other side, if your income is higher now than you think it will be when you retire, a traditional IRA will save you money in taxes.
Retirement Accounts If You’re Self-Employed: SEP IRAs and Solo 401(K)s
If your employer is paying you a stipend every month without taxes taken out — congratulations, you’re technically self-employed! That means you’re eligible for retirement plans where you act as your own employer. These plans include SEP-IRAs and Solo 401(k)s.
Everything you need to know about SEP IRAs
A SEP IRA is an employer-sponsored retirement plan that you can set up yourself as a sole proprietor (meaning: you work for yourself).
Contributions limits are much higher for SEP IRAs, and you contribute to the account as your own employer and not as an employee. SEP IRAs are like traditional IRAs: contributed money is tax-free.
Who can contribute to a SEP IRA?
- You must have made at least $650 from your employer (yourself).
- You must be at least 21 years old.
- Even if you are part of an employer-sponsored retirement plan at another job, you can still contribute to a SEP-IRA.
How much can you contribute to a SEP IRA?
SEP IRAs have much higher contribution limits: You can put in 25% of your income or up to $61,000 for 2022 — whichever is less.
When can I get my money from a SEP IRA?
- You can start taking disbursements when you hit retirement age (59 ½)
- You can take money out of your account before you hit retirement age, but remember that you’ll pay income taxes on the amount. You also might end up paying a 10% penalty on the withdrawal.
Everything you need to know about Solo 401(k)s
A Solo 401(k) is a retirement plan for a sole proprietor who has no employees (meaning you work for yourself and you don’t employ anyone else).
What makes a Solo 401(k) especially attractive is the fact that you can contribute to your fund both as your own employer and as your own employee. Contributions are made pre-tax, meaning that your taxable income for the year will be lower. When you hit retirement and start withdrawing money, the disbursements will be taxed as income. (You can also do a Roth solo 401(k), which flips the tax advantage and taxes your contributions now and makes your disbursements tax-free at retirement.)
Who can contribute to a Solo 401(k)?
- You must own a business to open a Solo 401(k) — and all you need is an employee identification number to qualify.
- There are no income or age restrictions to open a 401(k).
How much can you contribute to a Solo 401(k)?
- You can put a lot toward a solo 401(k) — way more than the Roth or traditional IRA options. For 2022, you can put up to $61,000 away, and if you’re over 50, you can add an additional $6,500.
- Keep in mind that you’re acting as two people when you have a solo 401(k): the employee and the employer. So, the total number above gets broken down by contribution type.
- As the employer, you can put $20,500 into your solo 401(k). (If you’re 50 or older, you can add another $6,500.)
- Now, when you’re acting as the employee, you can add up to $40,500.
- If you have a W2 job in addition to your self-employed work and you’re participating in that employer’s plan, remember that like IRAs, 401(k) limits follow the person and not the plan. Contribution limits will entail the total you’re putting into all of your 401(k)s.
When can I get my money from a Solo 401(k)?
- For the most part, you’ll need to wait until you’re at retirement age to get your disbursements (59 ½).
- If you take out money before you hit retirement age, you’ll end up paying extra taxes and penalties.
Most if not all of these plans can be set up online through banks or brokerage firms in a few easy steps, and whichever plan you choose, saving for the future is a critical way to take care of yourself. Finally: Don’t be ashamed if you can’t reach the contribution limits — any contributions will help you build a nest egg. With a little planning and the benefit of those contributions growing over time as they sit in those retirement accounts, your future is looking bright.