Savings What I Learned About a 401(k) That You Should Know, Too

by Julie Anne Russell | November 06, 2018

In my current role in the gig economy, I have the freedom to pursue meaningful work and do yoga on my lunch break.

But one aspect is now missing: a retirement plan.

Before recently going freelance, I was someone who had always relied on a 401(k) from my employer, so I didn't know what to do about this sudden hole in my savings plan.

So, in the spirit of discovery, empowerment, and not letting a intimidating acronyms (I’m looking at you, IRAs) stand between me and a well-funded retirement, this newly-minted freelance writer spent a week demystifying retirement investing.

The basics of a 401(k)

I began by researching one of the cornerstones of Americans' retirement savings, the 401(k) plan. Grant Sabatier, creator of Millennial Money, provided me with a helpful history lesson, pointing out that 401(k)s were originally meant to be a supplement to pensions.

But as the idea of a company taking care of you for the rest of your life faded, pensions went the way of the dodo bird by the 90s. Today, the 401(k) is America's primary retirement vehicle.

Upon leaving my old company, there was no way to make more contributions to my existing 401(k). I had to find a new way to save. Considering whether to launch a new 401(k) account for myself seemed like the next logical step. I consulted Kelly Gushue, a financial professional and founder of the website Personal Finance Warrior. She pointed out a key advantage of sticking with a 401(k) as a retirement savings vehicle: generally, the funds you invest in a 401(k) reduce taxable income, immediately saving you money.

Plus, you create a pool of capital that can grow exponentially over time. “There are two things that make money: People make money and money makes money. If you allow your money to make money, that’s half the battle won," explains Edu4Retirement, Inc. president Michael Callahan.

“The key is getting started,” Sabatier says. “Invest as much money as early as you can and often as possible. Every day and every dollar makes a difference over the long term." All the experts I spoke with agreed that the most important thing was for me to begin saving again — and to do it now.

Invest as much money as early as you can and often as possible. Every day and every dollar makes a difference over the long term.
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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).

When it’s automatic, it’s more disciplined. It’s a habit you’ll maintain.
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Turns out there's a short menu of IRA options, with traditional and Roth being most widely known. One of the major differences between them is the now-or-later tax payments. With a traditional IRA, you may be able to deduct contributions, which could reduce your taxable income for this year. A Roth IRA allows tax-free withdrawals in retirement, but doesn't have a tax benefit in the present — and there are income limits to eligibility.

Thinking about the contribution limits made me realize: Since I don't plan to contribute more than $5,500 this year (and I’m under 50), an IRA would be sufficient for my retirement savings. But setting up a 401(k) doesn't require me to put money into the account — and should business boom this year, I'd have another avenue to save money for retirement.

The long and short of retirement savings plans

After my week of talking to the experts, retirement planning was much easier to understand. It really is all about starting as soon as possible and making any contribution, even if it seems small, is significant. Along the way, I also discovered I was far from alone in feeling a bit lost on this topic.

As I sat in a restaurant discussing my plans to set up a solo 401(k) with a self-employed friend, our twenty-something waiter practically leaped across the bar to join our conversation. “I work here and I’m also a part-time musician, and I have no idea what to do about saving for retirement,” he lamented. “Can you help me?”

Yes, I believe I can.

Julie Anne Russell

enjoys empowering others (and herself) to dive into personal finance without fear. The Brooklyn-based writer's online work includes automotive, travel and finance writing, as well as profiles for Marie Claire.