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No 401(k)? No Problem. Here's How to Make the Most of Your Savings

When it comes to saving for retirement, one of the first things any financial expert will tell you is to take full advantage of your 401(k) -- especially if your employer matches your contributions.

But what if you don't have a 401(k)? Around 74% of employers offer 401(k) plans to full-time employees, which means the other 26% are on their own. And that also doesn't include those who are self-employed, work part-time, or freelance, as these types of employees typically don't have access to a 401(k) either.

However, lacking a 401(k) doesn't mean you have to settle for stashing your money in a savings account and earning a fraction of a percentage in interest each year. There are other types of retirement funds that can jump-start your savings and keep you on track for retirement.

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1. Traditional IRA

Next to a 401(k), an IRA is likely your best bet -- and sometimes, an IRA can be even better than a 401(k).

One of the biggest differences between a 401(k) and an IRA is that a 401(k) is provided by an employer, while an IRA must be set up by the account holder through a bank or brokerage. Both types of retirement accounts allow you to invest pre-tax money, both will charge you a penalty for withdrawing before age 59-1/2, and you'll have to pay income tax on withdrawals in retirement with both types of accounts.

The benefits: The major advantage IRAs have over 401(k)s is the wide variety of investment options they offer. With 401(k)s, you're limited to a list of investment options your employer has already chosen -- often a selection of mutual funds. With IRAs, however, your investment options are not limited by your employer, and you can choose from mutual funds, ETFs, and individual stocks and bonds.

Also, many 401(k) plans have hidden fees that can ultimately cost you thousands of dollars over a lifetime. While you can't escape fees with an IRA, the wide array of options allows you to shop around until you find ones that charge lower fees. Take advantage of resources like Morningstar to see how much each plan charges in fees, which will make it easier to compare and contrast different plans.

The drawbacks: There are two significant drawbacks to an IRA compared to a 401(k): the lack of an employer match and a lower contribution limit. Matching contributions are essentially free money, and IRAs simply can't offer that.

Further, IRAs only allow participants to contribute up to $5,500 per year for 2017 (or $6,500 if you're 50 or older), while 401(k)s let you contribute $18,000 per year (or $24,000 per year for the 50-and-up crowd). So if you're a power saver or have a high income, you may reach that limit before the year is up and be left with no choice but to invest extra cash in a taxable brokerage account.

2. Roth IRA

A Roth IRA is very similar to a traditional IRA -- they have the same contribution limit as traditional IRAs, and you can open an account at most banks or brokerages. The major difference is how your contributions are taxed. With a traditional IRA, contributions are generally tax-deductible upfront, but you'll pay income taxes on the money you withdraw in retirement. With a Roth IRA, it's the opposite: You pay taxes on the money going in, but not the money coming out.

The benefits: The main advantage of a Roth IRA over a traditional IRA or 401(k) is that you don't have to pay taxes on the money you withdraw. This makes it a little easier to plan how much money will actually be available to you in retirement, because once you reach age 59-1/2, you can withdraw every last penny in the account without paying income tax or penalties.

Another advantage of the Roth IRA is the lack of required minimum distributions. Traditional IRAs require that you start withdrawing your money at age 70 1/2, but Roth IRAs don't -- so if you have enough money from other sources of income, you can keep contributing to your Roth IRA and letting those investments grow.

The disadvantages: Unlike traditional IRAs and 401(k)s, Roth IRAs do have income eligibility restrictions. For 2017, only those who are earning less than $133,000 per year (if you're single) or $196,000 per year (if you're married filing jointly) are eligible to contribute to a Roth IRA. 

Not getting a tax break up front can also be considered a downside to some people, as all your Roth IRA contributions will be taxed in the year you make the contribution. While you will be able to withdraw that money tax-free, if you can't reach the maximum annual contribution amount, you'll end up saving less in a Roth than you would in a traditional IRA, which means your investments won't compound compound as quickly. A traditional IRA can free up more money to invest because of the up-front tax break.

3. SEP IRA or solo 401(k)

For high earners, the contribution limits are one of the biggest drawbacks of IRAs and Roth IRAs. Those with either of these types of retirement funds can contribute less than a third of what 401(k) participants can contribute each year, which is disappointing for people with high incomes.

Enter the SEP IRA and solo 401(k). These types of retirement funds are made specifically for self-employed individuals, and as with a traditional IRA or 401(k), contributions are made with pre-tax dollars, and withdrawals are subject to income tax.

The main difference between them is that solo 401(k)s are only available for self-employed individuals (and their spouses) who have no full-time employees working for them. SEP IRAs, on the other hand, are designed for business owners who want to offer retirement benefits to their employees (while saving for themselves) without all the hassle of an employer-sponsored 401(k).

The benefits: SEP IRAs and solo 401(k)s still have contribution limits, but they're far higher than those of IRAs and 401(k)s. For 2017, participants can contribute up to $54,000 per year or 25% of their net annual earnings -- whichever is less. Solo 401(k) participants over age 50 can also contribute an extra $6,000 per year. 

The disadvantages: If you're a business owner with employees, if you contribute to a SEP IRA, you'll also need to make equal percentage contributions to your employees' SEP IRA accounts as well. While this isn't necessarily a bad thing (because it's helping your employees save for retirement), it means you may not be able to contribute as much to your own fund.

Both SEP IRAs and solo 401(k)s can also be more complicated to set up than a traditional IRA, Roth IRA, or employer-sponsored 401(k), but if you're self-employed and have a lot of earnings to contribute, the high contribution limits may be worth it.

401(k) plans are wonderful retirement tools, but just because you don't have access to one doesn't mean you can't make the most of the options you have. There are plenty of other choices out there -- you just have to choose the one that's right for you.

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