What’s the easiest way to save without a 401(k)?

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Q. My son is about to get his first job – he’s just waiting for the call. It doesn’t offer a 401(k), though. What’s the easiest way for him to start an IRA? I want to make sure he starts this all on the right track and he keeps saving. I’m afraid if it doesn’t come out of his paycheck he won’t save it regularly.
— Trying to help

A. Congrats to your son.

He has options.

For those who are not self-employed but without an employer-sponsored retirement plan, such as a 401(k), Individual Retirement Accounts (IRAs) and Roth IRAs may both be opportunities to save, said Molly Rimes, a planning associate with Modera Wealth Management in Westwood.

She said these can be opened at any custodian such as Vanguard, Schwab or Fidelity. Some banks offer them, but they may only offer Certificates of Deposit as the investment, so they’re more limited.

With an IRA, your son would contribute funds from his bank account, and then when tax time comes around, take a deduction for the amount he contributed, Rimes said. Those funds would grow tax-deferred, and then he would pay tax, at ordinary tax rates, when he withdraws the funds.

“With a Roth IRA, the money used to fund the account is post-tax, so no deduction would be taken,” she said. “The account grows tax-deferred, and when funds are withdrawn, they are tax-free.”

Because this is your son’s first job, he may want to explore using a Roth IRA, as he may be in a lower tax bracket now compared to his future working years, Rimes said.

As for automating savings, there are a couple of options.

“If his job allows him to have multiple accounts for direct deposit, he can elect to have some of his income go directly into the IRA/Roth IRA,” she said. “If this is not an option, he can also set up automatic contributions from his bank account.”

Setting the automatic contribution for the day after payday is a good way to mimic it coming out of his paycheck, she said.

“Some funds even allow for automatic investment; otherwise he will need to remember to log into his IRA/Roth IRA and actually make the investment to avoid having it sit in cash,” she said. “Just keep in mind that annual IRA/Roth IRA contribution limits are $6,500 — $7,500 if 50 years old or older — or your earned taxable income for the year, whichever is lower.”

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This story was originally published on Sept. 8, 2023.

NJMoneyHelp.com presents certain general financial planning principles and advice, but should never be viewed as a substitute for obtaining advice from a personal professional advisor who understands your unique individual circumstances.