Help! I Don’t Have a 401(k). Can I Build Up a Large Nest Egg With Just an IRA?

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No 401(k)? No worries. Read on to see how you can still retire with lots of wealth by contributing to and investing in an IRA. 

One of the most desirable workplace benefits is access to a retirement plan. And data from the U.S. Census reveals that around 35% of Americans have a 401(k) or a comparable plan like a 403(b).

What this means, though, is that if you don’t have access to a 401(k) plan, you’re in the majority. And you may be stressed about saving for retirement in the absence of one of these plans. But rest assured that with the right strategy, you can do quite well for yourself with an IRA.

Why 401(k)s can lend to larger nest eggs

When saving for retirement, 401(k) plans have a couple of key advantages. First, many employers match 401(k) contributions to some degree, letting savers enjoy free money in their accounts. Because IRAs are self-funded and self-managed, employer contributions don’t come into play.

Also, 401(k)s come with much higher contribution limits than IRAs do. Beginning in 2024, savers under the age of 50 can contribute up to $23,000 a year to a 401(k), while those 50 and over can contribute $30,500 a year.

IRAs, however, will max out at $7,000 for savers under 50 starting in 2024. And for savers 50 and over, they’ll max out at $8,000. That’s a huge difference.

An IRA could lead to a lot of wealth

You might assume you’re at a huge disadvantage in the context of retirement savings because you only have an IRA to work with. But you should know that if you begin contributing to that IRA from a young age and fund it consistently, you can potentially grow a lot of wealth over time — especially if you invest your money in stocks.

Over the past 50 years, the stock market’s average annual return has been 10%, as measured by the S&P 500 index. So let’s say you invest your IRA in a S&P 500 index fund. Let’s also assume you contribute $300 a month to that account starting at age 25 through age 67. Given all of that, you’re looking at retiring with a balance of over $1.93 million.

If you’re able to save more than $300 a month for retirement, such as $1,000 (which an IRA alone won’t let you do given the annual contribution limits), you stand to grow an even larger balance.

But remember, just because IRAs max out doesn’t mean you can’t save beyond those limits. Let’s say you’re 40 and can afford to save and invest $12,000 a year for retirement. You’re limited to $7,000 in your IRA next year. But in that case, you can always invest the remaining $5,000 in a regular brokerage account. You won’t get a tax break in the process, but you’ll still get to enjoy the benefit of investing your money over many years.

Plus, the nice thing about a regular brokerage account is that it won’t have restrictions. With an IRA (as well as a 401(k) plan), penalties can apply for taking withdrawals prior to age 59 1/2. With a regular brokerage account, you can take withdrawals anytime you want. And so if you end up in a position where you’re able to retire early, having some funds outside of an IRA or 401(k) is actually key.

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