Saving for retirement without access to 401k, suggestions?

[investing_for_a_rainy_day]

Hi early retirement gurus! I'm working for a small bio/tech company, <1 year out of grad school, doing very interesting things with a lot of independence and responsibility and direct influence on the success of the company.

The salary is good, a bit above average for a company of this size in my area, but they essentially don't offer any benefits; no healthcare and no 401k/other.

My issue is that very soon I will have maxed out my rIRA and HSA and will still have ≈$16k in planned savings by the end of the year.

I'm somewhat new to all of this, so I looked in to possibly setting up a solo 401k, but from what I understand my self-employed venture would have to make >$18k in revenue to be able to save as much each year.

Are there any tax advantaged options that exist that an employed person with no 401k access could contribute to beyond the IRA/HSA? Or any other ideas for getting access to a solo 401k with a side gig? Thanks!

 

[bingybear]

When we RE 2 years ago we had more $ in after tax accounts than in "retirement" accounts, so I would think the obvious place from my experience would be just after tax accounts. In after tax accounts invest very tax efficiently.

At RE some after tax $ are useful if you RE before retirement accounts can be drawn from without penalty. There are often threads here about how to get cash flow before 59.5 years old.

One other option that many won't like, but get a variable annuity to invest in. If you do this, get a lower cost one from fidelity, schwab or vanguard. This my be less expensive than a small 401k if the employer is having the employees pick up the 401k cost.

I'm not a firm supporter of variable annuities. However, switching to a low cost one after being sold one at a young age was a winner for me. It has grown nicely.

I do like after tax.

As for a solo 401k... check you employment agreement. Most of the agreements I had wording that restricted side jobs or required approval of the company. YMMV

 

[Markola]

If I were you, I'd set up a brokerage account at Vanguard, set up an automatic monthly transfer from your bank, direct it all into the Vanguard Total Stock Market Index (VTSAX), and go enjoy my career. Aim for saving 50% of your income before you take on other obligations that seem to accumulate the further you get from the frugal grad school lifestyle. Do that and your work will automatically become optional in 10-12 years. I recommend highly the new book "A Simple Path to Wealth" by J.L. Collins, which is written for people exactly at your stage. Congrats on your education and great job and good luck!

 

[investing_for_a_rainy_day]

Thanks for the replies and suggestions!

Will grab the book and look in to variable annuities through Vanguard.

Are there any nice tools for estimating the taxes you'd pay on investments? Guess I should really sit down and just learn it. Any good literature on the technical details of taxes/fees in investments?

Good advice. I have kept my frugal grad school life going! Had to pay down $38k in undergrad loans during that time, and just now have got my emergency fund to a good place (about $20k), so I am not anxious to go spending a crazy amount.

Right now I'm saving ≈46.8% of my monthly takehome, getting to >50% will take a bit more work. My SO right now doesn't make a tremendous amount of money, so our shared living expenses are skewed towards me, but we're both fairly frugal and love budgeting.

 

[Fedup]

You can save a lot in Solo 401k, I think max is $53k.

 

[target2019]

Look at Michigan muni funds and etf's.
I think you live there.

 

[Blue Collar Guy]

sir, just my 2 cents, most of my money is in non tax deferred accounts, i painfully learned that bonds are a horrible idea in a taxed account, every year u will get HAMMERED in income tax on the interest, like another poster said, buy the vanguard total stock market index, do it weekly or monthly from your check book, thats what we do. you are young so a bond portion of your portfolio should be non existent anyway, when u do get a tax advantaged account that where you put ur bonds. hope this helps

 

[nun]

You can save a lot in Solo 401k, I think max is $53k.

You have to be a sole proprietor to have a solo401k, but you can save a lot to them.




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[nun]

One other option that many won't like, but get a variable annuity to invest in. If you do this, get a lower cost one from fidelity, schwab or vanguard. This my be less expensive than a small 401k if the employer is having the employees pick up the 401k cost.

I'm not a firm supporter of variable annuities. However, switching to a low cost one after being sold one at a young age was a winner for me. It has grown nicely.

At least we haven't mentioned Whole Life insurance yet....that's probably the worst tax advantage financial product for most people.

For the new investor I would not recommend a variable annuity because you need to really understand what you are buying and even then they are expensive. Tax deferral isn't everything so I would recommend that the OP simply open an account with Vanguard and automatically buy some low cost Vanguard stock funds every month. Don't over complicate this, having access to money outside of retirement accounts gives you lots of freedom which is often more useful than tax deferral.


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[target2019]

sir, just my 2 cents, most of my money is in non tax deferred accounts, i painfully learned that bonds are a horrible idea in a taxed account, every year u will get HAMMERED in income tax on the interest, like another poster said, buy the vanguard total stock market index, do it weekly or monthly from your check book, thats what we do. you are young so a bond portion of your portfolio should be non existent anyway, when u do get a tax advantaged account that where you put ur bonds. hope this helps

Except the muni fund/etf that is state-specific is tax exempt from fed and state taxes. One could argue for when to invest in such, but as part of a diversified AA, it could be a winner for OP in high tax bracket.

So, there would be no hammering from income tax.

 

[samclem]

You have to be a sole proprietor to have a solo401k, but you can save a lot to them.

Yes, you could put every dollar you earn as a sole proprietor, up to $18K, in the solo 401k (that's your contribution as the "employee") plus up to 25% ($54K max contribution for 2017) of your earnings as "profit sharing" (think of this as the "employer side"). And this is in >addition< to any tIRA/Roth IRA to which you'd contribute using your W-2 pay from your employer.

Consider weighing in to urge your company to start a company 401K plan. If it is a small company, you may have an impact. It is an important benefit that smart employees seek out, and the company should be interested in attracting smart employees. The plan needn't cost the company very much money, and it is an important (and expected) benefit even with zero company match. It'll help the company to be seen as more substantial. But, urge them to start the 401K with low cost fund options, and to avoid a 401K management company that will ask for a lot in fees.

 

[investing_for_a_rainy_day]

Thanks again to all.

Good idea to try and push for a low-cost 401k in the company, will see if I can do anything to that end.

As to the solo 401k; my employment contract doesn't forbid outside employment/self-employment, but does have a non-compete with the IP we're developing, so I'm sure I could clear something with them as long it wasn't interfering with work or overlapped.

Sorry for this naive question, but for the solo-401k, only income generated by that venture could be put in to the solo-401k, correct?

E.g. I have $16,000 from my salaried job waiting to be invested, but my contracting side-job only generates $1000 in income, I cannot put more than $1000 in to the solo-401k.

 

[Fedup]

Thanks again to all.

Good idea to try and push for a low-cost 401k in the company, will see if I can do anything to that end.

As to the solo 401k; my employment contract doesn't forbid outside employment/self-employment, but does have a non-compete with the IP we're developing, so I'm sure I could clear something with them as long it wasn't interfering with work or overlapped.

Sorry for this naive question, but for the solo-401k, only income generated by that venture could be put in to the solo-401k, correct?

E.g. I have $16,000 from my salaried job waiting to be invested, but my contracting side-job only generates $1000 in income, I cannot put more than $1000 in to the solo-401k.

I think it depends on how you get paid. Are you get paid by 1099 form? You can be sole proprietor and get the benefit of solo 401k. I did have to get an EIN from federal to start the 401k. But we didn't have an S-corp. I was able to put more than what my husband got paid in his 1099. I played around with Turbotax and got the combination that gave me the least tax. More employers contribution and less employee contribution. So in effect it was a negative year for my husband's consulting work. We paid negative tax rate this year.

 

[broadway]

Sorry for this naive question, but for the solo-401k, only income generated by that venture could be put in to the solo-401k, correct?

That is correct.

You should be using Schedule C-EZ to report your outside income.

 

[nun]

Sorry for this naive question, but for the solo-401k, only income generated by that venture could be put in to the solo-401k, correct?

E.g. I have $16,000 from my salaried job waiting to be invested, but my contracting side-job only generates $1000 in income, I cannot put more than $1000 in to the solo-401k.

When you do your Schedule C you'll compute the net profit. You can contribute $18k ($24k if you are over 50) and 25% of your profit. Last year I put $50k into a solo401k to reduce my income tax......but you can't reduce the self employment taxable amount, that's going to be 15.3% of earnings.

The OP should work on his employer to set up a 401k and save after tax until that happens.

 

[brucethebroker]

Do you own a house? Have you considered paying down your mortgage with part of your retirement savings? Nice, "guaranteed" return of 3-4% (on interest NOT paid over the years). Peace of mind in eventually having a paid for home should you lose your job, etc.

I would not put all of my retirement savings in that basket, but it might be a nice addition.

 

[MrLoco]

Except the muni fund/etf that is state-specific is tax exempt from fed and state taxes. One could argue for when to invest in such, but as part of a diversified AA, it could be a winner for OP in high tax bracket.

So, there would be no hammering from income tax.

Agreed. Plus by having a muni bond (bond fund) in a taxable account along with a low cost index equity fund would allow the OP to tax loss harvest when appropriate and re-balance to the desired asset allocation. Just be sure to have muni bonds in the intermediate range time line (those with a duration under 5-7 years) as we are almost certainly facing a long trend of increased interest rates.

 

[target2019]

Agreed. Plus by having a muni bond (bond fund) in a taxable account along with a low cost index equity fund would allow the OP to tax loss harvest when appropriate and re-balance to the desired asset allocation. Just be sure to have muni bonds in the intermediate range time line (those with a duration under 5-7 years) as we are almost certainly facing a long trend of increased interest rates.

Good advice.
In the early 90's started using Vanguard ST and LT tax-free funds for our state. I had a lot of self-employment income, and after maxing my SEP-IRA, I used these two funds to capture some income from the cash, and easily transfer excess to the LT bond fund.

I haven't really added to the LT bond fund since 1995. Just take the tax free income, and let it ride. It's a smaller part of the total, and was mentioning it as part of an approach.

 

[Scuba]

At your age, I would put 80-100% in equities. Like the idea of Vanguard total stock market ETF. Do ETF instead of mutual fund. As your income grows, mutual funds aren't very tax efficient.

 

[Jerry1]

It's great to have and max out all of the tax deferred accounts, but having done that myself, a word of advice. Don't limit yourself to the tax deferred accounts. At 56, I find myself 401K/IRA rich and now I have a big tax bill staring me in the face with few options to minimize it. When it comes time to retire, it will do you well to have various sources of funds to minimize your tax upon withdrawal.

The good news is that you're thinking about it early. Enjoy your career and spend some time each year planning and you'll be way ahead of most everyone else.

 

[nash031]

It's great to have and max out all of the tax deferred accounts, but having done that myself, a word of advice. Don't limit yourself to the tax deferred accounts. At 56, I find myself 401K/IRA rich and now I have a big tax bill staring me in the face with few options to minimize it. When it comes time to retire, it will do you well to have various sources of funds to minimize your tax upon withdrawal.

The good news is that you're thinking about it early. Enjoy your career and spend some time each year planning and you'll be way ahead of most everyone else.

Exactly, Jerry.

I think younger equity investors, in particular, need significant taxable investments if they intend to retire well before their tax-deferred accounts become accessible without 72t gymnastics. If you want to retire in your 40s or early 50s, limiting yourself only to tax-deferred savings is hard anyway as you may need more than you could build in those accounts alone, but will limit your flexibility in terms of your income streams in the future given the rules of 72t.

I'd stay away from variable annuities. In your shoes, I'd look at individual stocks (if that's your thing) or low-cost stock mutual funds in your taxable savings. You'll pay taxes on the dividends and likely LTCG taxes in that account, but it's still the most tax-efficient way to invest outside of the tax-deferred accounts. With a long investing horizon, equities are the way to go, IMO.

Another option is to explore another investment opportunity with that cash. Real estate, for example. Build the capital a little bit and consider purchasing a rental property to set up another income stream. One path to success in ER is to set up multiple income streams. Pensions (if you're lucky), dividend/interest income, rental property, side hustles, annuities (if you must)... all can provide diversity of asset classes which makes your plan more survivable in the event of a hit to one asset class.

TLDR: no to variable annuity, look at taxable brokerage accounts, consider another investment vehicle (Real estate?).

 

[samclem]

I think younger equity investors, in particular, need significant taxable investments if they intend to retire well before their tax-deferred accounts become accessible without 72t gymnastics.

That can work well, and gives a lot of flexibility for later. Nobody knows how rules and tax law may change. IMO, in the future there is a good chance that various factors will align to encourage rule changes so that Uncle Sam gets a bigger slice of some of those tax-favored accounts. Regardless, having flexibility is good.

Now, something to think about with those taxable accounts: As you are relatively young now and your earnings (and tax rate) can be expected to climb, try to select assets that either won't have a tax bite when you sell/exchange them (e.g. actively managed real estate) or which you can hang onto for decades without needing to sell (then, hopefully you'll be retired and in a lower tax rate). Examples might include "basic," broadly diversified low-cost MFs or ETFs. In 10-15 years you could find yourself in the 25% tax bracket and selling funds that have appreciated 50% will take a big tax bite, so owning basic fundamental holdings that you'll be okay with holding on to for another few decades will be important. You can put more esoteric or targeted holdings (that you might want to trade more frequently) in your IRAs.

 

[Rambler]

Your choice is pretty much limited to a taxable acct at a broker unless your side gig allows you to earn enough to make a solo 401k worth the trouble.

At this stage of the game, I would definitely not be putting money in annuities. Nor would I put money into munis, as the interest rate is too low. As mentioned above, VSTAX would be a good start for a mutual fund, but there are numerous others in Mutual fund or ETF formats that accomplish the same goal, SCHB, for example. With mutual funds, you will have cap gains distributions which will have tax consequences. ETFs do not, only dividend distributions, which also have tax consequences. If you can afford to pay that tax from salary, put your dividends on auto-reinvestment. You can do all of this yourself thru Vanguard, Fido, or Schwab (the latter being my personal preference). Plus, with Vanguard or Schwab, you won't have to pay trading fees for their proprietary funds...no cost to buy the fund, and very low fees, which you never see unless you research the fund to find out how much they charge. Broad market index funds always seem to be the cheapest, and guess what...they usually outperform other funds in the long term because they are well diversified.