Rich Girl Roundup: No Access to a 401(k)? Here's What to Do

Katie: Welcome back, Rich Girls and Boys, to the Rich Girl Roundup weekly discussion of The Money with Katie Show. I'm your host, Katie Gatti Tassin, and every Monday morning, we are going to dig into an interesting money discussion. But before we do that, here is a quick message from our sponsors.

As a reminder, there is a bonus episode in our feed this week. It is my second episode on Fresh Invest with Fidelity and Morning Brew's Alex Lieberman, so tune in if you would like. But otherwise, we are still on our regular content schedge, so let's get into it. Before Henah introduces our question this week, this week's upcoming main episode is about building a healthy financial ecosystem. It is a bit of a back to basics episode, but I'm excited about it, because sometimes it's just nice to revisit those foundational financial principles. I think they tend to be things that we get away from over time if we're not thinking about it, so be sure to tune in for that, and we will move on to the roundup. Okay. Henah, how are we doing?

Henah: I'm good. I'm still laughing, because we just watched your microphone fall off the table as we were recording.

Katie: My camera?

Henah: Yeah. It was hilarious to watch. Are you all good now? No more...

Katie: Yes. I'm composed. I've been ready.

Henah: Oh, okay. Well, let's get into it then. This week's question came from Laura V. "How would you recommend saving for retirement if you don't have access to employer-sponsored accounts or an HSA?" And I really resonated with this question, because I was in this boat for a really long time. Once I started here, I realized what a detriment that is to growing my retirement account, especially when I was in my 20s and 30s.

Katie: I'm curious what makes you say that—why you feel like not having access to a 401(k) prevented you from or was a detriment to your saving in your 20s?

Henah: I think it's twofold. We talk on the show a lot about how the money you put in your 20s or 30s is the foundation that your 401(k) relies on. It won't be able to snowball if there's really no snow to start with, and so that was one big reason. The other reason is I was not having access to a 401(k), but I also was not making very much money where I had enough to put into a taxable brokerage account or something like that. So for me, that was a real challenge, and also that there was no tax break that I could leverage even if I could have money to put aside.

So I think I'm going to let you maybe handle what the obvious answer here is, I think, in terms of the accounts you can set up, but I wanted to talk to you a little bit later about what you can do to maybe see if you can get access to an employer-sponsored account in the future. Your only option in the beginning if you're a W-2 salaried person is a traditional IRA and then some sort of taxable brokerage account. Is that right?

Katie: That is what I was thinking, is you would just need to use an IRA, which you can open no matter what as long as you have earned income. And whether you wanted to use Traditional or Roth is totally up to you. It depends on what you're prioritizing, and I think if you don't have access to an employer plan, you can get that tax deduction for a Traditional IRA at, I believe, any income. I'm frankly not sure why the IRS doesn't just make the IRA and 401(k) contribution limits the same. In 2023, you can put in up to $22,500 into a 401(k). You can only put in up to $6,500 into an IRA.

There are, of course, the catch-up contributions once you're in your 50s that allow you to put in a little bit more in both cases. But it doesn't totally make sense to me why they don't just standardize that deferral allowance, because it seems like the obvious answer that would really level the playing field for people.

Henah: I used to think that too. I was like, this isn't really fair that just because I work somewhere that doesn't offer it, I only can put in a fourth, really.

Katie: Right. The reason I was asking why you felt like it was a hindrance, I was curious if you were going to mention automation at all. Because technically, you could take your income and just invest it on your own somewhere else. It's not like someone needs a 401(k) to invest. Just the fact that the paycheck deduction nature of a 401(k), the fact that you elect it up front, the money just gets taken out and shuffled away somewhere you can't see it, it might be matched by an employer.

It just makes it so much easier, I think, and removes a lot of friction such that I believe human psychology would dictate that people that have access to that are just more easily going to save and invest money, versus people that are having to make those decisions with their paycheck that they see in their checking account and it's like, "Ooh. Well, I could transfer this money somewhere else or I could spend it on X, Y, Z."

Henah: Yeah. I wasn't making enough that I had enough to put aside in these things. It wasn't really a question of automation, but it is a really good point in the sense that now that I'm doing it, I don't even think about it. It just happens, and I possibly saved whatever the max is this year without changing my lifestyle in any way. What about things like if they have a side hustle or entrepreneurial business? I think that there's the SEP IRA, the Solo 401(k). What about those as alternatives to an employer account?

Katie: Totally. Well, those open a ton of doors. They're not as well-known, I find, but whether you choose a SEP IRA or a Solo 401(k) for your side hustle income, they do have different rules. So I would recommend looking into them separately, because depending on how much you're earning, you may opt more for one or the other. And depending on how quote unquote "legitimate" your business is, are you just getting a couple 1099s from a freelance thing? Are you an LLC, you have an EIN number, you are Ms. Official? It's probably going to dictate which one you would choose.

But in both cases, those types of accounts actually allow you to put away a lot more money depending on how much business income you have. So if you are someone working full-time with W-2 and you also have a side hustle that's bringing in the dough, you can put in, it usually works out to be around 20% of your net business income into these accounts. But the Solo 401(k) is an interesting differentiator in that sense, because you can actually make a $22,500 employee contribution to that account. Not regardless of how much you're making, but if you make $22,500 of business income, then you could theoretically do that big employee contribution to the Solo 401(k). You wouldn't have to make five times that or whatever the inverse of 20% is in order to contribute to one.

Like I said, it kind of depends, and I would look into both of them separately or talk to an accountant about what the best option is. But they're a great way to defer a lot of income for retirement, and even more in many cases than a W-2 job would allow you to do.

Henah: I think that we're essentially telling somebody, "Well, if you want that, your option is really to start a side hustle." And so for folks who they want to just keep their W-2 salaried job, they're not in a position where they want to leave, I think this is a really interesting time to talk about something like intrapreneurship, which is where you're building systems and initiatives inside your current workplace. And so this is something that, like I said, I had dealt with for a long time, where it wasn't even an option. It wasn't that it wasn't matched. It wasn't that it was kind of a wonky plan with lots of fees. It was just that I didn't even have access to a 401(k).

And so I would really incentivize listeners like Laura to see if there's any way they can advocate for adding a 401(k) plan to their business's HR benefits in 2024 or in the near term. Because I was looking at some research that has come out, and it said that according to this survey from Gusto, which used to actually be my old payroll company, they work with 200,000 small and midsize businesses and they did a study that said that a 401(k) plan can lead to an annual cost savings of more than $100,000 in reduced employee turnover costs alone, which is twice the return on the initial costs of offering the 401(k) in the first place. So I do think retirement benefits in general lead to better retention. People are happier. They're more willing to stay.

And then a separate survey that I found from Willis Towers Watson, WTW, but it was from earlier this year, and they said that half of the 365 US employers that they surveyed are expecting a lot of retention and attraction issues over the next couple years, saying that a lot of these employers out of that group are trying to enhance their 401(k) plans to get people to stay. Personally, I would've been more inclined to stay at my former jobs if they had offered something like that, but I got to a point in my 20s where I was like, I have to get my financial retirement picture in place, and so that was a big incentive for me to leave. What strikes you about that, Katie?

Katie: Yeah, I think advocating within your organization for them to add it makes sense. I think it probably depends on how large the business you work for is. There might be reasons why people that work for companies that are like three people don't have a 401(k) plan that are beyond the employer just not wanting to offer one, but I'm sure there's something that the employer could offer.

Henah: Well, the companies I worked at were five people, six people, five people respectively, so they were pretty small. But the ones that did, I mean, they talked pretty openly about the fees that they were incurring in order to offer it, but I think they saw it as an investment in their employees and keeping everyone happy and in line with wanting to retire at a traditional retirement age. I think it said 75% of small business owners do not offer retirement benefits yet. But one of the things that I was reading about is that there's new tax breaks and state mandates in states like California, which, go figure, of course, Oregon, Illinois, they are making it such that you have to offer something through the state plan.

And so that is also helping to increase the accessibility to those accounts that employees get every year, which is good news, but I feel like if you are working for a small company, which we're going to talk about in a different episode, but that's a large majority of the businesses in the US, I still think it would benefit you to try to offer it even if the fees are a little bit higher up front, because I think you're going to get a much better return in the long run.

Katie: So that's basically the case that you would make to HR, right, is that you're going to improve your own retention, and that in the long run, paying the fees to have a plan administrator and to offer this benefit is going to pay for itself and then some, because your people are going to be more likely to stay?

Henah: Yeah, I think so. I mean, the studies are backing it up, and just through my own experience, I also would've more likely stayed if that had been an option for me.

Katie: I got you. Yeah, I think the one thing that I would just try to make sure you do in the event that that line of reasoning is not successful or they're like, "No, sorry. We're still not doing it," or maybe there is a good reason that we're not aware of, but I think to give yourself the best shot at true dollar cost averaging the same way that you would have with the 401(k), whether you're opening an IRA and a taxable brokerage account or you're opening both and then you're just automating contributions and transfers the exact same way that you would with 401(k) paycheck deductions.

So it's like, "Okay, on payday, $200 is getting automatically transferred to that account," or $200 to each account, whatever it is. That way, you're not inadvertently saving net less money than you would have otherwise, simply because you did not have access to this one type of account. I think that that's probably the most important piece, even more so than whether or not you're using an IRA or a brokerage account, just making sure that you're still consistently making contributions and trying to mirror that automation as much as you can. That would be, I think, my approach in that situation.

Henah: Yeah, I think that that makes a lot of sense. I have a question for you, Katie. Is there a point at which you've talked to HR, they're not willing to budge, we see the long-term benefit, is there a point at which you say, "Okay. Well then, I'm out"? Is it that you would be willing to switch to another job with the same pay but access? How valuable is it in your mind that you stay at a job that you enjoy versus trying to find a similar job that could offer it? Does that make sense?

Katie: I see. Well, I think it probably depends on what type of tax break I'd be giving up. Let's assume instead of contributing $22,500 to a 401(k), I'm only allowed to put $6,500 into an IRA, and therefore, as a result of that, I'm missing out on $16,000 worth of tax deferral. Which in my income bracket in this example, pretend it's 32%, so I'm giving up about $5,000 in tax breaks every year that I know I want, because I want to be able to retire early or I anticipate that I would be making pre-tax contributions. And I can quantify how much that's costing me. So I don't know that I would be like, "Ooh, I'm going to change companies simply because I don't have a 401(k)," particularly if my pay is competitive. If you're going to give me $300,000 and I don't get a 401(k), I'd be like, "Oh well." You know what I mean?

Henah: Sure.

Katie: Who cares? But if I'm getting $50,000 and I don't get a 401(k), and I can go work down the street for $50,000 and get one, then yeah. I mean, I guess I would try to quantify the value of the tax break, because I think that's what you can't mimic with something else. You can mimic a portion of it with the IRA. You can invest on your own in a brokerage account. But I think that tax break and maybe even the match that you would be able to get somewhere else, the opportunity cost of not having a match, that's probably what I would be trying to weigh and judging, do I even like this job? Would I give up a job I liked that paid well because it didn't have a 401(k)? No. But if I didn't like other things about it, then I probably would be more willing to move.

Henah: That all makes sense to me. I'm only laughing because I thought that you would, you as Katie, being who you are, would be like, "Yeah, I'd f-in' leave a job because they didn't give me access. I want the tax break."

Katie: There's also other ways to invest. Some people have access to 401(k)s and don't use them, because they're investing in rental properties or they're buying small businesses or they're doing other things that are going to produce income in the future. And I guess in my own wealth-building paradigm, the way that I intend to produce income in the future is by withdrawing money from these types of accounts. So if my job is actively inhibiting my ability to do that, something to think about, but the 401(k) is not the end all be all.

And so I would say if you don't have a 401(k) but you got interest and you want to get into rental property investing, that really interests you, or small business investing, there are so many ways to produce income. This just happens to be my most preferred way, because I think it's the easiest and it's the one that most average people can do pretty easily.

Henah: You guys can't see it, but her shirt says, "I love tax breaks" on it.

Katie: I wear that shirt every day under all my clothes.

Henah: Under all her clothes.

Katie: Okay. Well, that's all for this week's Rich Girl Roundup. We will see you Wednesday to talk about how you can build your healthy financial ecosystem so it works for you rather than against you. Bye.

There it goes again. It's this stupid tripod they just got me. It's too wiggly. I'm trying to keep us on track. We don't have time to [bleep] around, but my camera is not cooperating.