Reader Mailbag: Acorns and What to do Without a 401(k)

Have money questions? Got a topic you wish I’d cover that I haven’t gotten to yet? Reach out! You can contact me directly through the blog! My email is in my contact information, or you can reach out on our comments section on any article. Today we’re going to tackle our first reader mailbag article (names changed to protect readers’ identities). Here we go!

What’s the best retirement option if my employer doesn’t offer a 401(k)?

This is a fantastic question. A 401(k) is a perk offered by employers to attract talent, so not all employers offer one. If you work for a government agency or certain nonprofit organizations you might be offered a 403(b) instead, but they’re almost identical in function to the 401(k). So what options exist if you don’t have access to one of these accounts?

First and foremost determine if your employer offers a Health Savings Account, or HSA. The reason an account like a 401(k) is valuable is because your workplace likely offers an employer match meaning your employer will put in money on top of what you put in, usually up to a certain percentage. They’re also tax advantaged meaning that when you put money into them the government doesn’t charge you taxes on those dollars (read how this family gets away with almost $0 in taxes despite earning $100,000!), though you likely will pay later when you take money out.

So what does that all have to do with a HSA? While a 401(k) match is very powerful and ranks highly in the 10 Step Plan, the Health Savings Account is the most powerful tax advantaged retirement account available to Americans. It’s often pitched and used as a savings account in which you can save your money to pay for medical bills, and it certainly can do that. The secret power of the account, however, is that it’s the only retirement account in America that you can use to pay $0 in taxes forever. Not even a 401(k) can do that! The HSA is so powerful I’ve dedicated an entire article to it which you can read here.

Your next bet for retirement savings outside your employer offered options is an IRA, either the Traditional IRA path (you pay taxes later) or the Roth IRA path (you pay taxes now and don’t pay taxes later). These are tax privileged plans that allow you to save for retirement in your own account that you control. Which is right for you? That’s up for you to determine but generally a Traditional IRA is for someone who thinks she will have less income later than she does right now; by not paying taxes now she would save money when she takes it out later at a lower tax rate. A Roth IRA is for someone who thinks he will have more income later than he does right now; by paying taxes now at a lower rate he saves money later when he withdraws money tax free that would otherwise be taxed at a higher rate.

The right call for your situation is one you’ll have to determine for yourself, though you can hedge and invest in both. You’ll only be able to invest the annual maximum ($5,500 if you’re under 50 in 2016) across both accounts, but it’s an option. Find out more about the Roth IRA here.

What do you think about Acorns and similar apps?

If you’re unfamiliar, Acorns is an investment app targeted towards millennials that automates your savings. You install it on your smart phone, hook it up to a bank account that you make purchases with, and whenever you buy something it “rounds up” your purchase to the next dollar and invests the difference in an account for you.

Let’s say you head over to your favorite sandwich shop, get your usual lunch combo, and hand over your $9.57. Acorns registers this when you pay with the debit card/bank account associated with your Acorns account and rounds that purchase up to $10. It takes the remaining $.43 and invests it into the portfolio you chose upon setting up the app. It’s a small amount of savings in any single instance but over the course of a month your savings can add up.

So what are the pros of Acorns? They invest entirely in Exchange Traded Funds or ETFs, which is exactly where you want to be with your investments. Their fee structure is also pretty reasonable and breaks down as follows:

• If you’re under 24 you pay $0 on investments (they really target us millennials!)
• If you have under $5,000 invested you pay $1/month
• If you have over $5,000 you pay .25% of your assets

To determine your portfolio you answer a few questions, and you can adjust it manually at any time. You can withdraw your funds whenever you want, and you can add more to your account manually (capped at $10,000/day at the time of this writing). When you add everything up, Acorns is a fine option for investing provided you’re already following the 10 Step Plan! Their $1/month fee as a percentage of assets can be a bit large when you’re starting out, but the real kicker is that you owe taxes on your Acorns account; it’s not part of a tax advantaged savings plan.

Still, for an investment app it’s pretty slick. It automates your savings and allows you to put the money where you want to be putting it instead of paying someone to rob you. If you’ve maxed out your tax advantaged retirement savings and want to save a bit more without thinking about it, Acorns might be for you. If you’d like to start investing with it you can get $5 for free using this link (or the graphic below).

If you’d like to check the app out without the $5 credit their official website is here.

(This section contains a referral link. You can read more about how I handle referral marketing on the Bill Stark Blog here, plus get $5 from Amazon).

Reach out!

That’ll do it this week for our first reader mailbag. If you’ve got questions you’d like me to answer, reach out! You can email me directly at this link or drop me a line to billtriesagain@hotmail.com.