How to Open a 401(k) Without an Employer

Reviewed by Thomas J. CatalanoFact checked by Suzanne KvilhaugReviewed by Thomas J. CatalanoFact checked by Suzanne Kvilhaug

Many Americans don’t have access to 401(k) plans. Only 67% of private industry workers, 63% of civilian workers, and 39% of state and local government workers have access to defined contribution retirement plans in 2023, according to the Bureau of Labor Statistics. For workers in small businesses, it’s 47%.

Unfortunately, if you work for an employer, you can’t set up your own 401(k). (However, you do have other options, such as opening an individual retirement account (IRA).) The exception is if you’re self-employed. In that case, you can open your own retirement plan—there’s even an account called a solo 401(k).

Here’s what you need to know.

Key Takeaways

• If your company doesn’t offer a 401(k), you still can save for the future with an IRA, among other options.
• If you’re self-employed, you can set up your own retirement plan (e.g. a solo 401(k), a SEP IRA, and/or a SIMPLE IRA). An IRA is also an option.
• For 2024, you can save up to $7,000 in an IRA. (For 2023, it’s $6,500.) For both years, if you’re age 50 or older, you can contribute an additional $1,000.

The Role of a 401(k)

Like many retirement plans, the 401(k) plan takes its name from a provision in the Internal Revenue Code (IRC). Section 401(k) of the IRC was enacted in 1978 to give a tax break to working civilians who deferred income for retirement.

Two years later, consultant Ted Benna created the first true 401(k) plan with the Johnson Companies. Benna’s plan has been copied and modified ever since.

Today, employees can choose to defer income through automatic deductions from paychecks into employer-sponsored 401(k) plans. Deferred money is left untaxed and can be directed to any investments listed in the plan, most of which are mutual funds.

Deferred funds must be left in defined-contribution plans until an employee reaches age 59½, unless they qualify for a hardship withdrawal. Otherwise, the funds are subject to a 10% early withdrawal penalty.

Why Your Employer Doesn’t Offer a 401(k)

The most common reason an employer doesn’t offer a 401(k) is that most of their jobs are entry-level or part-time. The average worker in these positions is living paycheck to paycheck, so saving for retirement is difficult; most workers would pick getting more money upfront instead of a retirement plan anyway.

There are other reasons why your employer might not offer a plan. An employer might not have the experience or time to create an individually-designed plan or have a go-to financial institution. In these cases, plenty of employers make the decision not to offer benefits rather than spend time and money chasing a good sponsor.

Some companies used to offer 401(k) plans but decided to drop them. This sometimes happens because a company is losing money and scrambling to reduce expenses. Other times, it’s because of new management, or because workers aren’t participating in the plan and it’s no longer sensible to keep it open.

Note

For 2024, the 401(k) contribution limit is $23,000 (it was $22,500 in 2023), with a $7,500 catch-up contribution for those 50 or older (same in 2023).

Alternatives to a 401(k)

The most obvious replacement for a 401(k) is an individual retirement account (IRA). Since an IRA isn’t attached to an employer and can be opened by just about anyone, it’s probably a good idea for every worker—with or without access to an employer plan—to contribute to an IRA (or, if possible, a Roth IRA).

However, there are limitations to an IRA. Most glaring is the IRA’s contribution limit, which is considerably less than a 401(k)’s. For 2024, the limit for an IRA is $7,000 (up from $6,500 in 2023.) If you’re 50 or older, you can contribute up to an additional $1,000. For a 401(k), in contrast, the 2024 limit is $23,000 (up from $22,500 in 2023.) If you’re 50 or older, you can contribute up to an additional $7,500.

Some employers offer matching contributions for their 401(k) plans, which is essentially free retirement money for the worker. Most IRAs can’t include this kind of matching contribution. (The exception: SIMPLE IRAs.)

Given these kinds of limitations, workers should supplement their IRAs with other retirement strategies. For example, your employer might offer stock options. Certificates of deposit (CDs) can be an attractive savings vehicle if interest rates are high. There are other options for tax-deferred retirement income, such as annuities or permanent life insurance policies, though these have their own drawbacks, such as high fees.

Tax-free or tax-deferred savings vehicles are ideal. Once these options have been exhausted, workers can also turn to other investments, such as mutual funds, stocks, bonds, or real estate.

Self-Employed Options

If you’re self-employed—that is, you own a business as a sole proprietor, independent contractor, or freelancer, and that business produces income—you don’t have an employer to offer a 401(k) to you. However, you do have alternatives. In addition to opening a traditional or Roth IRA, you have three key options: a solo 401(k), a SEP IRA, and/or a SIMPLE IRA.

Solo 401(k) 

A solo 401(k) is a tax-advantaged plan that is similar to an employer-sponsored 401(k). The difference is that you act as both the employer and the employee. Solo 401(k)s offer greater control compared to employer-sponsored 401(k) plans. You can also contribute as both the employee and the employer, giving you a high contribution limit: for 2024, it’s up to $69,000 or 25% of your income / total profits, whichever is lower. (For 2023, it was up to $66,000 or 25% of your income / total profits, whichever is lower.) If you’re age 50 or older, you can contribute an additional $7,500.

SEP IRA 

A simplified employee pension (SEP) IRA allows you to contribute pre-tax earnings. Only an employer can contribute to a SEP IRA—not the employee, and the employee must be at least 21 years old. The contribution limit is the same as a solo 401(k): up to $69,000 or 25% of your income / total profits, whichever is less.

SIMPLE IRA 

SIMPLE IRAs are also available for small businesses—those with less than 100 employees. This includes sole proprietors. They’re less expensive than a 401(k) to operate but they work in much the same way. If you’re self-employed, you act as both employer and employee. As the employee, for 2024, the maximum contribution limit is $16,000 ($15,500 in 2023). Those age 50 or older can contribute an additional $3,500. As the employer, you must either match your contributions “dollar-for-dollar up to 3% of your net earnings,” or “make a non-elective contribution of 2% of your net earnings”, as long as it doesn’t exceed $345,000 in 2024 ($330,000 in 2023), according to the Internal Revenue Service (IRS).

Is a 401(k) Mandatory for Employers?

Most employers are not required to offer a 401(k); however, some states have passed legislation that requires employers to offer retirement plans.

What Can I Do if My Employer Doesn’t Offer a 401(k)?

Even if your employer does not offer a 401(k) plan, you can still save for retirement. Options include encouraging your company to set up a retirement plan or opening an individual retirement account (IRA).

What Makes a 401(k) Valuable?

Beyond the contribution limit, the value of a 401(k) is determined by two things: how well the 401(k) is run and the fees. Many plans are adequate for most investors, and most fees are not terribly high, though they do vary.

However, you can only control so much, so it’s possible that you might want to—at least partly—try to handle retirement investing on your own. Try to think in terms of what you’re actually getting, and what your alternatives are. Consider opening an IRA and exploring other options, such as real estate.

The Bottom Line

Individuals cannot open a 401(k) unless their employer offers one; however, if you are self-employed or own a business, you can open other plans, such as a solo 401(k) retirement plan, a SIMPLE IRA, or a simplified employee pension (SEP) IRA.

Read the original article on Investopedia.