It's easy to invest when your employer offers a 401(k). But what if they don't? Here's how to invest and how to save for retirement without one.At 24, I had no clue how investing worked. I didn’t know a stock from a bond. Index fund? What’s that? My idea of investing was the hope that my childhood Beanie Baby collection might be worth money someday.

However, despite my lack of even basic knowledge around the subject, at the time, I was actually investing without even realizing it.

To make up for a modest salary, my employer had a nice perk: something called a 401(k) match. You save a little of your own salary in a retirement account, and they match some of your savings.

“You have to do this,” an older coworker told me. “It’s basically like they’re giving you money.”

My coworker seemed to know what he was talking about, so I filled out some paperwork and elected to deduct a little bit of money from every paycheck and automatically save it in my 401k. I never missed the money, and a few years later, I had somehow saved $10,000. Later, I would learn how this happened: compound interest, a diverse portfolio, and mutual funds. At the time, though, I still had no idea about any of this. I just saved a little every month and let my employer-sponsored 401(k) do the work. It was a sweet deal.

Note: If you do have a 401K match like I did, you should take full advantage of it. Meaning, save enough in your 401(k) to get the full match from your employer. Let’s say your employer offers to match $1 for every $1 you save with a cap of 6% of your salary and you earn $30,000 a year. That means you can save up to $1,800 of your own salary each year, and your employer will save another $1,800 on your behalf! 

Not everyone is lucky enough to have a 401(k), though. Plus, beyond the match, most experts don’t recommend saving additional funds in a 401(k) because the fees are usually so high and you don’t get much flexibility over your investing options. So how do you start investing if:

  • You’ve hit the match, but you want to save even more for retirement?
  • You’re self-employed or freelance and don’t have an employer-sponsored retirement plan?
  • You have an employer, but they don’t offer a 401(k) benefit?

If any of the above scenarios describe you and you’ve been meaning to learn how to invest or how to save for retirement, you’re probably curious about what kind of account you should even open in the first place. Here are your options.

TRADITIONAL IRA and the ROTH IRA

An IRA is an Individual Retirement Account, which seems pretty simple and self-explanatory. You, as an individual, open this account to save for your retirement. Easy, right? But there are two basic types of IRAs to choose from:

  • The Traditional IRA
  • The Roth IRA

There are a handful of differences between the two, but the main trait that sets them apart is how they’re taxed. Like most retirement accounts, both Traditional and Roth IRAs have some kind of tax advantage.

Traditional IRAs are Tax-Deferred

With a Traditional IRA, your contributions are pre-tax. This means, at tax time, you can deduct the amount you saved in your Traditional IRA that year from your taxable income. (Well, as long as you’re eligible. High-earners might not be eligible for this perk.) In other words, you pay less in taxes now. This also means, however, that you will pay taxes on the amount you save in this account and also the amount you earn from your investments as they grow when you withdraw the money at retirement. You pay taxes later.

Roth IRAs Have Tax-Free Growth

With a Roth IRA, your contributions are post-tax. This means, at tax time, you can’t deduct anything you saved that year from your taxable income. The good news is, when you retire, you don’t have to pay taxes on the money with you withdraw from your Roth IRA — after all, you already paid your taxes! But even better, you don’t have to pay taxes on the amount you earn from your investments as they grow, either. Your savings can grow tax-free!

So to put it in really simple terms:

Traditional IRA: You pay taxes later

Roth IRA: You pay taxes now

Like I said, there are other differences between these types of accounts. They have different rules for withdrawing your money, for instance, and if you make too much money, you might not even be able to open a Roth. You can read more about all the differences here, but the tax advantage is the main thing most of us will want to consider.

So which do you pick? Personally, the fact that your savings can grow tax-free in a Roth seems like an incredible advantage and most experts would agree with me (which is why the Roth is such a popular option among personal finance geeks). Then again, saving money on taxes NOW with a Traditional IRA is a really nice option, too. There’s a general rule for deciding which one you should pick: If you think you’ll make more money now, go with the Traditional. If you think you’ll make more money later, go with the Roth. It’s a basic rule, but whichever account you pick, the most important thing is to just get started investing. The more time you have for your money to grow, the better. That said, you could also do both — open a Traditional and Roth IRA. The government does put a limit on how much you can save, though: $5,500. If you have two IRAS, a traditional and a Roth, you can only save $5,500 in both, not each.

Now, let’s say you’re self-employed, you have your own freelancing business, and you want to save more than $5,500. In that case, you might want to look at a SEP-IRA or a Solo 401(k) instead of (or in addition to) a regular IRA.

SEP-IRA

I first heard about this option in The Money Book for Freelancers, Part-Timers, and the Self-Employed by Joseph D’Agnese and Denise Kiernan. (Highly recommended reading for my fellow freelancers out there)

A SEP-IRA, or Simplified Employee Pension Plan, is basically a Traditional IRA for self-employed people. It’s designed to allow employers to set up and save money in a retirement account for employees. But if you have your own business without any full-time employees and simply want to save more for yourself, you could open a SEP-IRA and act as both the employee and employer. You (the employer) contribute money to the IRA for your employee (also you).

It’s a great option for freelancers who earn a lot of money (no, that’s not an oxymoron) or just want to save more than $5,500 a year for retirement. You can save up to $53,000 or 25% of your compensation as an employee, whichever amount is less.

SOLO-401k

The SOLO-401k is another option D’Agnese and Kiernan suggest for freelancers in their book. It’s a bit more complicated than a SEP-IRA, but it has potentially better benefits if you want to save A LOT of money. We’ll get to that in a bit.

A Solo 401(k), sometimes called a self-employed 401(k), works just like any other 401(k) plan except that you can open one for yourself as a business. It’s designed for employers who don’t have any full-time employees other than themselves, the “owner” of the business. Like any other 401(k) or Traditional IRA, you can deduct the amount you save in your Solo 401(k). So what’s the main draw of this account over a SEP-IRA for self-employed people? The contribution limits.

If you want to save even more than 25% of your earnings, the Solo 401(k) is for you. In this post I wrote on how to handle taxes as a freelancer, Sam of the Financial Samurai made the case for this type of account:

I go the solo 401k route as a freelancer, b/c it allows you to potentially contribute up to $54,000 in pre-tax savings. SEP IRA is only 25% of operating profits… which I guess you can get to $54,000 as well if you make $216,000 in operating profit.

But w/ the Solo 401k, you can contribute $18,000 on much lower income e.g. $50,000. Whereas if you made $50,000 operating profit, you can only contribute $50K X 25% for SEP IRA = $12,500.

In short, the Solo-401(k) gives you more flexibility over how much you can save. In reality, though, most self-employed people will probably do just fine with a SEP. If you want to save more than 25% of your income for retirement, though, it’s something to look into.


If the idea of opening a retirement account on your own seems too daunting, you can always go with a robo-advisor or a Certified Financial Planner®.

Robo-advisors are digital solutions to investing. It’s usually an app that opens an investment account on your behalf and then walks you through how to save in that account, doing all the legwork for you. Keep in mind, though, not all of these apps open retirement accounts for you. Some of them are just regular old taxable investment accounts. That’s not necessarily a bad thing, but if you’re trying to save for retirement (the main reason most people start investing), you’ll want to double check that whatever service you use is indeed opening a retirement account on your behalf. Also, some of these accounts, like most 401(k)s, come with higher fees than you’d pay investing on your own. Here’s some recommended reading if you’re interested in investing with a robo-advisor:

If you’re new to freelancing, I would highly recommend talking to a Certified Financial Planner®, who can also help you navigate how to save for retirement and how to invest. Just make sure your CFP is an actual CFP with the little logo behind their name. That logo is important! It means they take an oath to work in your best interest instead of just selling you investments. Look up legit CFPs here.

Finally, once you know what kind of account to open, the next step is figuring out how to actually start investing in that account. I don’t want to leave you hanging, so here’s a complete guide  I wrote (along with my former Lifehacker editor) about how to invest. And if you have any questions, leave them in the comments below and I’ll do my best to answer.

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Kristin writes about money, travel, and human behavior at Lifehacker, the New York Times, New York Magazine, and Mentalfloss. She's also written for NBC News, Fox Digital, and Scripps Network Interactive. Learn more about her here.

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