Making contributions to a 401(k)
If you have a 401(k) plan at work, the amount you contribute is a percentage of your salary. “Contribute at least enough to get the full match from your employer,” Sabatier advises. Typically, 3% to 6% of your salary that your company agrees to “match” dollar for dollar. “The match is completely free money. It’s like getting a 100% return on your investment.”
Next, start having deductions taken automatically. “One of the reasons I recommend starting retirement saving with a 401(k) is that it comes right out of your paycheck,” Gushue says. “When it’s automatic, it’s more disciplined. It’s a habit you’ll maintain.”
But there’s no company match when you’re self-employed. From Sabatier I learned that setting up a solo 401(k) — for individuals running a business with no employees, other than a spouse — could be beneficial to me.
Because I can put money in as both the employer and the employee, a solo 401(k) could help me make greater contributions — and get a larger tax deduction. (Compare that to an employer-provided 401(k), which tops out at $19,000 or $25,000 if you are age 50 or over, as of January 2019.) I could contribute when I wanted, but I would be under no obligation to add funds.
Meanwhile, I could also contribute up to $6,000 per year ($7,000 if you are age 50 or over starting in January 2019) to an individual retirement account (IRA) — more acronyms!—using it as a savings vehicle on its own or in tandem with a solo 401(k).