Making a Living as a Freelancer? Here’s How to Save for Retirement
By: Cheryl Winokur Munk - December 13, 2017
From Uber to Etsy to Lyft to Fiverr, more people are making their livelihood from freelancing. But directing a solo career—and not having a company-sponsored retirement plan—also means taking full responsibility for your retirement savings. And that’s an area where many freelancers may be falling short.
Saving for retirement can be particularly challenging for gig-hoppers who don’t always have a steady stream of income and aren’t automatically enrolled in a company retirement plan. Indeed, people who work for themselves may forget to set aside money regularly or don’t make it a priority.
“If you do nothing, you’ll have nothing,” says Ed Slott, a certified public accountant and founder of irahelp.com who educates consumers and financial advisers on retirement savings.
A good first step for freelancers is to understand their options. The choices they make will depend on factors such as their income, how much they want (and are able) to contribute and whether they have employees or plan to hire them.
“Whether you are taking a gig or working full time for a corporation, you still need to have that same long-term plan,” says Stein Olavsrud, a certified financial planner and executive vice president of FBB Capital Partners, a registered investment adviser in Bethesda, Md. “Your long-term plan doesn’t stop just because your source of income has changed.”
Here is a look at some of the ways freelancers can achieve tax-advantaged retirement savings:
A Roth individual retirement account allows an investor to set aside after-tax income up to a specified amount each year. For 2017, that amount is $5,500 ($6,500 for those age 50 or older). While Roth IRAs provide no immediate tax advantage, earnings and withdrawals are generally tax-free after age 59½. There are income limits, however: In 2017, single filers are ineligible to contribute to a Roth IRA if they make $133,000 or more; that figure is $196,000 for a married couple filing jointly.
“For freelancers who often aren’t in a high tax bracket, to be able to put money away that will be tax-free for retirement, it’s a heck of a deal,” says Michael B. Keeler, a certified financial planner and chief executive of Peak Financial Solutions, a Las Vegas-based financial-planning firm.
Another advantage of the Roth IRA is that investors have access to their contributions, penalty and tax-free, if they should really need it, Mr. Keeler says. That may be particularly attractive for freelancers who don’t always have a steady income and could sometimes find themselves in need of cash.
For many freelancers, a Roth IRA is “probably the best way to dip your toes in the water,” because it’s an easy, no-frills way to start saving, says Mr. Slott.
That said, people whose income can vary greatly from year to year may not want to limit themselves to one type of plan. Say a freelancer contributes to a Roth IRA one year but exceeds the income limit the next year. In that case, it might be beneficial to be able to contribute to another type of retirement plan, one with higher contribution limits. Freelancers should explore all of their options, Mr. Slott says, since “each year stands on its own.
For help determining how much a person can contribute, the Internal Revenue Service website has a section on calculating retirement-plan contributions and deductions.
A solo 401(k) might be particularly attractive to freelancers who make too much money to contribute to a Roth IRA, or who want to set aside more money than they could in other types of retirement vehicles.
“It gives you the flexibility to put a lot more away,” says Don Riley, chief investment officer at Wiley Group, a registered investment adviser in West Conshohocken, Pa. There is typically no cost to set up a plan—and there is no IRS filing requirement, unless the plan balance exceeds $250,000 of assets—and even then it’s an easy form to fill out, he says.
Mr. Slott recommends freelancers consider the Roth option on the solo 401(k), where contributions are after-tax and withdrawals are usually tax-free in retirement. Although some people might prefer getting the tax break up front, tax deductions are often spent rather than invested, he says. Letting the money grow in a 401(k) tax-free instead, is “another way to pay yourself first,” Mr. Slott says.
Any business owner with one or more employees, or anyone with freelance income, can open a Simplified Employee Pension Individual Retirement Arrangement, or SEP IRA.
The plan offers tax-deferred growth potential and contributions are tax deductible. How much a person can contribute can vary each year; contributions are limited annually to the smaller of $54,000 (for 2017) or 25% of an employee’s compensation.
Unlike other retirement plans, investors can establish a SEP IRA and make contributions all the way up to their tax-filing deadline, including extensions, which offers additional flexibility for freelancers.
A Savings Incentive Match Plan for Employees Individual Retirement Account, more commonly known as a Simple IRA, can be opened by anyone who is self-employed or who owns a small business with 100 employees or fewer. Like a 401(k), a Simple IRA allows employees to make pretax contributions. Employers are required to make either matching or nonelective contributions for each employee that participates in the plan, and they get a tax deduction for doing so.
Employees can contribute up to $12,500 in 2017 and an additional $3,000 if they are age 50 or older; the employer match is additional. They can defer a greater percentage of their earnings than in a SEP IRA, but the maximum contributions are less than a SEP IRA or solo 401(k); it’s also a slightly more complicated plan because there are more variables that need to be considered when determining annual contribution levels.
If somebody is unsure about which option may be best, they can always consult a financial adviser or certified public accountant. Also, they can plug in their net income on Bankrate.com and determine how much they can put into a variety of different account types.
“You really have to be diligent when you are freelancing,” says Jessica Landis, a certified financial planner and director of financial planning at Janney Montgomery Scott in Philadelphia. “The younger you start, the better off you’re going to be.”
Article source: wsj.com