Can I Open a 401(k) Without an Employer?

Employer-sponsored 401(k) plans are a popular way for workers to save for retirement, but they’re not the only way. If you’re self-employed or your employer doesn’t offer a 401(k), there are retirement savings vehicles out there that will work for you. Let’s take a look at both solo 401(k) plans and IRAs. If you’d like personalized advice about planning for retirement, consider working with a financial advisor.

What Is a 401(k)?

A 401(k) is an employer-sponsored retirement account that offers tax benefits. A traditional 401(k) will be withdrawn from your paycheck pretax and will only be taxed when you withdraw from it in retirement. A Roth 401(k) is similar, but the money that goes into it is already taxed, so it won’t be taxed when you withdraw from it in retirement. You can withdraw from your 401(k) penalty-free beginning at age 59 ½.

Once you deposit money into a 401(k), it’s invested according to your choices—you’ll be presented with investment options when you complete the paperwork. That money will grow not just through contributions, but through interest and earnings on those investments.

These plans were specifically created to incentivize workers to save for retirement. If you contribute to a traditional 401(k), your taxable income is reduced due to the 401(k) withholdings. If you’re contributing 6% of your income to a 401(k), you don’t owe taxes on that 6% of your income. With a Roth 401(k), instead of saving on taxes in the year, you contribute money to your 401(k) and you’ll enjoy the savings when you withdraw it in retirement.

Can You Open a 401(k) Plan Without an Employer?

As a 401(k) plan is an employer-sponsored retirement account, there’s an option for a self-employed person with no employees to open one with themselves as the sponsor. This is called a solo or one-participant 401(k) plan.

A solo 401(k) works exactly like a traditional 401(k) plan you would get with an employer—you’re just the employer and the account holder. Just like a 401(k) plan with an employer, there are contribution limits, but they’re much higher because you are serving as both employee and employer. We’ll cover those contribution limits later.

If you’re not a self-employed person, your best option is likely an individual retirement account (IRA). Whether you opt for a traditional IRA or a Roth IRA, both are tax-advantaged savings vehicles that will help you prepare for the future and have similar benefits to 401(k) plans.

Some traditional IRAs will also allow you to deposit pretax income and only pay taxes upon withdrawal in retirement. IRAs offer a great deal of freedom because, outside of income thresholds, they are not related to your employment status and you can open one anytime. Roth IRAs are funded with taxed income, but withdrawals aren’t taxed unless you withdraw before the age of 59 1/2.

You’ll need an employer identification number (EIN) to open a solo 401(k), but you can easily find a provider for the retirement accounts mentioned. Compare reviews and choose one with the benefits and features that work for you.

How Much You Can Contribute to Your Retirement Account

Understand how much you can contribute to your retirement accounts, without an HR department to help you, you could run into trouble. The IRS sets contribution limits that often change. Here are the limits for 2023:

• Solo 401(k): Solo 401(k) limits are a bit more complicated because you are serving as both the employee and employer. These are divided into elective deferrals, of up to $22,500—or $30,000 if you’re 50 or older—and employer nonelective contributions of up to 25% of compensation as defined by your plan. Total contributions cannot exceed $66,000. The IRS recommends using the worksheets in Chapter 5 of Publication 560, Retirement Plans for Small Business to figure out your allowable contribution rate and tax deduction for your 401(k) plan contributions.

• Traditional and Roth IRAs: Both types of IRAs have the same annual contribution limit of $6,500—$7,500 if you’re 50 or older—or your taxable compensation for the year if it’s less than those numbers

The Bottom Line

While your options are a little different without an employer-sponsored 401(k), there are fantastic retirement savings options available for self-employed workers or those that don’t have plans available through their employer.

Do some research to see which one is right for you, then open a retirement account to prepare for the future while unlocking tax savings.

Retirement Planning Tips

• Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with up to three vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.

• Use SmartAsset’s free retirement calculator to see if you’re on track to meet your retirement goals.

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