If I Don’t Have a 401(k) Option, How Can I Save for Retirement and Get Tax Benefits?

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Welcome to Ask Clark, a column designed to answer your financial questions, by money expert Clark Howard.

Without a 401(k), What Are My Options To Save for Retirement?

Sonny asks: “I have a new job offer. The company will not provide a 401(k) in 2022 but will provide something called a “deferred compensation plan.” I’ve never heard of that. Can you please help me understand what deferred compensation plans are? If I don’t have a 401(k) option, what are my options to save for retirement and get tax benefits?”

Clark’s Take on How To Save for Retirement Without a 401(k)

Clark says: “Usually, a deferred compensation plan is what’s known as a ‘non-qualified’ plan. It means that the company makes an agreement with you where some of the money they would pay you instead goes into the deferred compensation plan, and then they reward you for it, for putting money in, with typically an embedded interest rate or some other kind of reward.”

If you’re thinking about taking your employer up on a deferred compensation plan, you should know that there’s a downside: Deferred compensation plans are seen as company assets, so they aren’t protected from creditors.

“With a deferred compensation plan, the money is not safe and secure like it is in a 401(k). So if the company went bust, you lose that money,” Clark says.

Before you agree to a deferred compensation plan, Clark says you should find out from your employer whether it’s a qualified plan.

“If you see that it’s a non-qualified plan, that’s when you know your money would be at risk,” he says.

When it comes to retirement planning, here’s another option that Clark believes is superior to a deferred compensation plan, a 401(k) and even a traditional IRA (individual retirement account).

“Since you can’t do a 401(k), what do you do? You set up your own Roth IRA. You won’t get a current tax deduction, but the money you put in — up to $6,000 a year — grows tax-free and then in retirement you spend it tax-free.”

To learn more about investing for retirement, read our Investment Guide.

To hear Clark’s full take on this question, listen to the segment:

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