You cannot enroll in a 401(k) without first having an employer, unless you yourself are the employer. A 401(k) is a form of qualified retirement plan, meaning it qualifies for favorable tax treatment for both employers and employees participating in the plan. Qualified plans such as the 401(k) are designed to encourage employees to plan for retirement, and for employers to help them do that.
Employees are restricted to selecting a 401(k) arrangement that is offered by their employers. A 401(k) plan enables employees to distribute tax-deferred income straight from their paychecks into an investment account that is dedicated to saving for retirement. Some 401(k) plans feature a cash-match arrangement in which employers match some portion of the employee's contribution to the account. Because of the plan's focus on retirement, participants who remove funds from the plan before age 59 1/2 must pay a penalty as well as tax on the money.
Employers may set eligibility guidelines for participation in their 401(k) plan. Often, these guidelines include a minimum age for the employee and a minimum length of service. The standard age requirement is 21 years, and the standard duration of service is one year. However, employers have some leeway to devise guidelines that veer from those standards. If employees are covered under a collective bargaining agreement, the company may keep them out of its 401(k).
The one way to have a 401(k) without an employer is to keep the plan you opened before you left. You would need to have remained with the employer long enough to enter the plan. Businesses often do not not allow you to keep your 401(k) with them when you leave unless your account balance is large enough. Plan participants with less than $5,000 in their 401(k) typically are forced to take their money somewhere else.
The IRA Alternative
Investors who want to save from retirement but who do not have access to an employer-sponsored 401(k) plan have a number of alternatives. One that bears some similarities with the 401(k) is the individual retirement arrangements. This includes traditional IRAs, SIMPLE IRAs and Roth IRAs.
Like 401(k) plans, IRAs are investment accounts meant for retirement, they have tax advantages, and they have penalties for early withdrawal of the funds. You must have taxable compensation to contribute to an IRA.
Many people roll over the money from their 401(k) plans into IRA accounts when they leave their jobs.
Tom Gresham is a freelance writer and public relations specialist who has been writing professionally since 1999. His articles have appeared in "The Washington Post," "Virginia Magazine," "Vermont Magazine," "Adirondack Life" and the "Southern Arts Journal," among other publications. He graduated from the University of Virginia.