By Cameron Huddleston / GoBankingRates
“Steps to Maximize Your 401k”. “How to master your 401k”. “Ways to Increase Your 401k”. Headlines like these are common in personal finance publications and tend to give the impression that a The 401k account is the way to save for retirement. For most employees, it is.
About 80 percent of full-time workers have access to employer-sponsored retirement plans, most of which are 401k, according to the American Benefits Council. But if you’re not a full-time employee and don’t have access to a 401k or similar work plan, you may be wondering how you’re supposed to save for retirement.
As a freelance writer, I haven’t had access to a retirement plan in 15 years, but that hasn’t stopped me from saving. In fact, there are several ways to build a nest if you work part-time and don’t have access to a retirement plan at work, are self-employed, or have your own business.
“It sometimes seems daunting to think about having to open your retirement account and browse through the many investment options, instead of connecting to the company-sponsored 401k plan or pension plan if you work for a company, ”said Michael Hardy, a certified financial planner with Mollot & Hardy in Amherst, NY But in fact, it’s easy to set up any of the available plans if you save on your own, he said.
Here are five ways to save for retirement if you are not a full-time employee and do not have access to a work retirement plan. “I would recommend that anyone who is self-employed use one of these plans or a combination of these plans,” said Josh Alpert, owner of Motor City Retirement Advising in Royal Oak, Michigan.
1. Save on a traditional IRA
As its name suggests, an individual retirement agreement (or IRA) offers people a way to save for retirement on their own. While it’s not specifically targeted at the self-employed, as employees can also open one of these accounts, a traditional IRA is an easy way to build a nest egg, especially if you can’t afford to book a large amount each. year. .
If you’ve earned income, you can contribute up to $ 5,500 to an IRA in 2016, or $ 6,500 if you’re 50 or older. You can open an account with a bank or financial institution, an investment company or even a life insurance company, and you can invest in a variety of stocks such as stocks, bonds, mutual funds, exchange traded funds , annuities and certificates of deposit.
There are also some nice tax advantages of a traditional IRA. You can deduct the full amount of your contribution to your federal tax return as long as neither you nor your spouse are covered by a retirement plan and your adjusted adjusted gross income is $ 183,000 or less. In addition, you will not have to pay any income tax on your IRA investments until you withdraw the money in retirement.
2. Save on a Roth IRA
The contribution limits for a Roth IRA are the same as a traditional IRA and you have the same wide range of investment options. But there are some key differences between a Roth and a traditional IRA.
Even if you must have earned income to contribute to a Roth, you can’t have too much. Your modified adjusted gross income must be less than $ 117,000 if you are single, or $ 184,000 if you are married filing a joint return, to contribute a maximum of $ 5,500, or $ 6,500 if you are 50 or older in 2016. may contributing is reduced if you earn between $ 117,000 and $ 132,000 if you are single and between $ 184,000 and $ 194,000 if you are married by filing a joint return. Once your income exceeds the higher end of these limits, you will not be able to contribute to a Roth.
The other big difference is that you can’t deduct Roth’s contributions. However, you do not have to pay any taxes when you withdraw money from a Roth as long as you are 59 and a half years old or older and have the account for five years. Therefore, a Roth can be a great source of tax-free income during retirement.
Alpert said Roth IRAs are a great way for younger adults to save because they have the benefit of time. While Roth’s contribution limit is relatively low, money can grow significantly thanks to compound interest if you start saving at a young age. And it’s likely that by the time you reach retirement you’ll be at a higher tax level than when you first started contributing, which makes Roth’s tax-free withdrawals especially appealing.
But if you want to have enough savings for a comfortable retirement, you’ll probably need to open another type of account. “Ultimately, the contribution limits of a Roth make it difficult to trust just one,” Alpert said.
3. Save in a SEP
After leaving a full-time job to become a hired worker, I incorporated my 401k into a Simplified Employee Pension (SEP) and have been saving on that account ever since. This retirement account can be used by freelancers and small business owners and can be easily set up with a bank, brokerage or investment firm such as Fidelity or T. Rowe Price. I set up mine with Vanguard due to its very low rates.
The self-employed can contribute up to 20 percent of net self-employment income to a SEP; business owners can contribute up to 25 percent of the compensation, up to a maximum of $ 53,000. An accountant, financial planner, or even tax software can help you calculate the actual dollar amount you can contribute.
Because contributions to a SEP are tax deductible and deferred taxes grow, it’s like you have free money from the government, Alpert said. Whatever amount you spend on this account is basically protected from income taxes until you retire it. You have until the due date of your tax return in April to open and fund a SEP, which makes this account good for procrastinators.
4. Save on a Solo 401k
Freelancers can save on a 401k by setting up a single participant – or solo – 401k. And you can book more with one of these individual accounts than with a 401k workplace. This is because you can act as an employee and as an employer.
As an employee, you can contribute up to 100 percent of your earned income up to a maximum of $ 18,000 in 2016, or $ 24,000 if you are 50 or older. In addition, you can contribute up to 20 percent of net self-employment or 25 percent of compensation as a business owner. However, the combined contributions may not exceed $ 53,000.
Because you can book a percentage of income and an employee contribution, a 401k solo allows you to book more at lower income levels than with an SEP, Alpert said. I didn’t opt for 401k solo more than a decade ago when I became self-employed because rates were high and providers were limited. Now many financial institutions offer 401ks solo and there are low cost options. You must open an account and make contributions by December 31st.
5. Save on a SIMPLE IRA
You can put all of the net income from self-employment in a SIMPLE IRA, up to $ 12,500, Alpert said. In addition, you can make an equivalent contribution of 3 percent as an entrepreneur and an additional contribution of $ 3,000 if you are 50 or older.
Obviously, the maximum contribution is not as high for a SINGLE IRA as for a SEP or a single 401k. But if your self-employed wages are low, you can contribute more with a SIMPLE than with a SEP because there is no income limit percentage. You can open one through a bank or other financial institution.
You’ll notice that “making your business your retirement fund” doesn’t appear here as a way to save. While many freelancers who run their own business believe their business will be their retirement plan, “it just shouldn’t be the case,” Hardy said. Instead, you should get used to saving for your future each month with one of these accounts because they will allow you to diversify your holdings and make sure there is money for your retirement if you can’t take advantage of your business.
With any of these accounts, many investment companies will allow you to set up automatic monthly contributions from your checking account, Hardy said. And the amount you can contribute can be as low as $ 25 a month, he said.
If you are not working with a financial advisor to select investments for your account, Hardy recommends investing in target date funds, which automatically change equity holdings to less risky fixed income assets as you approach retirement date. . And be sure to pay attention to commissions when creating an account, which can affect your returns. The lower the rates, the better.
This post was originally posted to GOBankingRates.
More from GOBankingRates:
- Is a self-directed IRA suitable for you?
- 21 questions to ask before retiring
- How To Master Your 401k At 50
Add Comment