What's the best way to save for retirement as a freelancer?
September 28, 2011 9:32 AM Subscribe
What's the best way to save for retirement as a freelancer?
401k, IRA, Roth IRA-- I nod my head knowingly when I hear people talking about these things. I have no clue what they are. Are they available to me as a freelancer? I need to balance saving for retirement now and having a cash reserve for the inevitable slow times that hit all freelancers.
In terms of specifics, based in the United States and retirement is a long way off.
401k, IRA, Roth IRA-- I nod my head knowingly when I hear people talking about these things. I have no clue what they are. Are they available to me as a freelancer? I need to balance saving for retirement now and having a cash reserve for the inevitable slow times that hit all freelancers.
In terms of specifics, based in the United States and retirement is a long way off.
Whatever you do the key is dollar cost averaging. Pick a dollar amount that you can save every month and have it sent to your Roth automatically every month. Also diversify into at least three funds to start. An index fund of one of the major markets, an international growth fund and a US based growth fund.
posted by Gungho at 9:49 AM on September 28, 2011
posted by Gungho at 9:49 AM on September 28, 2011
I'm not TOO knowledgeable about this, but I do know that IRAs are definitely available to you as a freelancer.
The difference between an IRA (either the Roth kind, or the other kind) and a 401-K is: the IRAs are things you can set up on your own, at your own bank or any other bank of your choosing. A 401-K is something an employer has to do for you, because it's tied to a paycheck (they take a portion out of your gross paycheck each week -- you tell them up front how much to take each week -- and they MATCH that amount and put it into a savings account for you).
IRAs, though, are all you. Think of them as just a combination savings account/investment account/time capsule. You can put money INTO your IRA whenever you want, as often as you want; but the understanding is that you will not be taking money OUT of that account until you retire. The bonus is: when tax time comes around, whatever the total amount of money you put into your IRA that year is, the taxman will pretend that money does not exist, and so you will not have to pay taxes on that income. And as long as you leave it in there until you retire, you will NEVER pay taxes on it.
It is technically possible to withdraw money from an IRA if you get into a really tight spot; it's not recommended (because if you don't put it back within a month or so, you'll have to pay taxes on it as income). But it's not like the bank is going to fold its arms and say "no, you're not allowed to touch it."
When you get an IRA the bank may ask you questions about how much "risk" you want in your "portfolio"; this means that your IRA will be split among a few differnet kinds of investments (some stocks, some savings bonds, some other things), some of which are riskier than others. Your youth means you can stand to go a little riskier (if the economy tanks really bad in ten years, you'll still have a chance to make it back), but you can still go for low-risk if the thought of that just freaks you out. You do NOT have to specify what stocks to put your IRA money in; the bank can decide that for you.
As to how to make this work for you on a practical basis: I have a regular savings account, and I put a portion of any check I get right in there over the course of the year. Then at the end of the year, I transfer most, if not all, of what is in that savings account straight to my IRA. I will admit that I"m not clear as to the difference between a traditional IRA or a Roth IRA; I will leave soemone more knowledgeable to discuss that.
posted by EmpressCallipygos at 9:52 AM on September 28, 2011 [2 favorites]
The difference between an IRA (either the Roth kind, or the other kind) and a 401-K is: the IRAs are things you can set up on your own, at your own bank or any other bank of your choosing. A 401-K is something an employer has to do for you, because it's tied to a paycheck (they take a portion out of your gross paycheck each week -- you tell them up front how much to take each week -- and they MATCH that amount and put it into a savings account for you).
IRAs, though, are all you. Think of them as just a combination savings account/investment account/time capsule. You can put money INTO your IRA whenever you want, as often as you want; but the understanding is that you will not be taking money OUT of that account until you retire. The bonus is: when tax time comes around, whatever the total amount of money you put into your IRA that year is, the taxman will pretend that money does not exist, and so you will not have to pay taxes on that income. And as long as you leave it in there until you retire, you will NEVER pay taxes on it.
It is technically possible to withdraw money from an IRA if you get into a really tight spot; it's not recommended (because if you don't put it back within a month or so, you'll have to pay taxes on it as income). But it's not like the bank is going to fold its arms and say "no, you're not allowed to touch it."
When you get an IRA the bank may ask you questions about how much "risk" you want in your "portfolio"; this means that your IRA will be split among a few differnet kinds of investments (some stocks, some savings bonds, some other things), some of which are riskier than others. Your youth means you can stand to go a little riskier (if the economy tanks really bad in ten years, you'll still have a chance to make it back), but you can still go for low-risk if the thought of that just freaks you out. You do NOT have to specify what stocks to put your IRA money in; the bank can decide that for you.
As to how to make this work for you on a practical basis: I have a regular savings account, and I put a portion of any check I get right in there over the course of the year. Then at the end of the year, I transfer most, if not all, of what is in that savings account straight to my IRA. I will admit that I"m not clear as to the difference between a traditional IRA or a Roth IRA; I will leave soemone more knowledgeable to discuss that.
posted by EmpressCallipygos at 9:52 AM on September 28, 2011 [2 favorites]
It depends on how much you make. Assuming this is a full-time thing for you timewise and incomewise, a Solo 401k is the best option. I believe Vanguard has a Solo Roth 401(k) that is inexpensive.
At the same time, you can also contribute to an IRA or a Roth IRA as the above answers nicely explain.
posted by michaelh at 10:25 AM on September 28, 2011
At the same time, you can also contribute to an IRA or a Roth IRA as the above answers nicely explain.
posted by michaelh at 10:25 AM on September 28, 2011
As a freelancer, you have a few different vehicles available to you:
An IRA is a good place to start. With a "traditional" IRA you can deduct it from your taxes now, but will pay income tax on withdrawals when you retire. With a Roth IRA, you do not get a tax deduction on your contributions now, but your future withdrawals will be tax free.
However, your annual contribution limit is the same as a freelancer as it is for anyone else: $5,000 if you are 49 or younger. This may well not be sufficient retirement savings, depending on what your income is.
As a freelancer, you can also fund a SEP IRA, which will allow you to put away more money. You can contribute up to about 18% of your income (the exact formula is a bit complex) to a SEP IRA, in addition to or instead of a tradition or Roth IRA. A SEP IRA works like a traditional IRA in that it is deductible from your current taxes but you will pay income tax on withdrawals after retirement
There are also self-employed 401(k) plans out there. I'm actually in the process of setting up one of these myself (I currently have Roth and SEP IRAs) under the guidance of my financial adviser. With a self-employed 401(k) you can make contributions in two separate ways: up to 16,500 of "salary deferral" which comes from you wearing your "employee" hat, and up to 20% of your business's net earning while wearing your "employer" hat (called a "profit sharing" contribution). And on top of that, you can still fund a Roth.
The main reason to consider a self-employed 401(k) is that you can pump a bigger contribution into than a SEP IRA. If you have a banner year, for example, and want to put extra money toward retirement AND want to ease your present tax burden. Or let's say you come into a windfall or have been accumulating savings aimlessly in nonretirement accounts and want to get it into a tax-advantaged retirement account NOW. The other advantage of a 401(k) is that you can borrow against it in the event of a a financial emergency. This is a last-resort option, of course, but it's better than facing a hefty penalty for making an early withdrawal from an IRA.
You can open up most of these accounts with a place like Vanguard or Sharebuilder. You would be responsible for deciding on what investment vehicles you want to invest your money in. Most people go for mutual funds, but I know that with Vanguard you can also link a SEP IRA to a brokerage account and trade individual stocks, exchange-traded funds, etc. Fewer places offer self-employed 401(k)s, and the fees associated may be higher.
posted by drlith at 10:36 AM on September 28, 2011 [3 favorites]
An IRA is a good place to start. With a "traditional" IRA you can deduct it from your taxes now, but will pay income tax on withdrawals when you retire. With a Roth IRA, you do not get a tax deduction on your contributions now, but your future withdrawals will be tax free.
However, your annual contribution limit is the same as a freelancer as it is for anyone else: $5,000 if you are 49 or younger. This may well not be sufficient retirement savings, depending on what your income is.
As a freelancer, you can also fund a SEP IRA, which will allow you to put away more money. You can contribute up to about 18% of your income (the exact formula is a bit complex) to a SEP IRA, in addition to or instead of a tradition or Roth IRA. A SEP IRA works like a traditional IRA in that it is deductible from your current taxes but you will pay income tax on withdrawals after retirement
There are also self-employed 401(k) plans out there. I'm actually in the process of setting up one of these myself (I currently have Roth and SEP IRAs) under the guidance of my financial adviser. With a self-employed 401(k) you can make contributions in two separate ways: up to 16,500 of "salary deferral" which comes from you wearing your "employee" hat, and up to 20% of your business's net earning while wearing your "employer" hat (called a "profit sharing" contribution). And on top of that, you can still fund a Roth.
The main reason to consider a self-employed 401(k) is that you can pump a bigger contribution into than a SEP IRA. If you have a banner year, for example, and want to put extra money toward retirement AND want to ease your present tax burden. Or let's say you come into a windfall or have been accumulating savings aimlessly in nonretirement accounts and want to get it into a tax-advantaged retirement account NOW. The other advantage of a 401(k) is that you can borrow against it in the event of a a financial emergency. This is a last-resort option, of course, but it's better than facing a hefty penalty for making an early withdrawal from an IRA.
You can open up most of these accounts with a place like Vanguard or Sharebuilder. You would be responsible for deciding on what investment vehicles you want to invest your money in. Most people go for mutual funds, but I know that with Vanguard you can also link a SEP IRA to a brokerage account and trade individual stocks, exchange-traded funds, etc. Fewer places offer self-employed 401(k)s, and the fees associated may be higher.
posted by drlith at 10:36 AM on September 28, 2011 [3 favorites]
As others have noted, multiple variables mean there's no one-size-fits-all answer. I'd strongly encourage you to take a peek at The Money Book for Freelancers, Part-Timers, and the Self-Employed by Joesph D'Agnese and Denise Kiernan. It's filled with common sense advice that's too rarely advised, and the explanations of IRAs, SEPS, KEOUGHs, SIMPLE IRAs, Solo 401(K) and more are very clear and easy to comprehend.
posted by The Wrong Kind of Cheese at 9:14 PM on September 28, 2011 [1 favorite]
posted by The Wrong Kind of Cheese at 9:14 PM on September 28, 2011 [1 favorite]
This thread is closed to new comments.
Have you read MeFi's favorite Get Rich Slowly?
Clark Howard also has a nice Investment Guide.
posted by BuffaloChickenWing at 9:41 AM on September 28, 2011 [2 favorites]