Retirement Tips for Freelancers

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Roth IRAs and HSAs can do double duty for you, providing funds if needed today, but also allowing you to save for retirement.

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Can’t imagine finding the cash flow to set aside money for your future? Roth IRAs and HSAs can do double duty for you, providing funds if needed today, but also allowing you to save for retirement.

Being self-employed has plenty of perks, but it also comes with a major retirement challenge.  There’s no company-sponsored retirement plan that you are automatically signed up for. It’s all on you to figure out what type of retirement accounts make sense for you, and figure out a way to save consistently.

That’s not exactly an easy ask. In a recent survey, barely one-third of self-employed workers reported they were consistently saving for retirement.

Even if you’re feeling a bit financially squeezed, there are tax-smart ways to start saving for retirement. A Roth IRA and a Health Savings Account (HSA) can generate tax-free income in retirement, but can also be used today, if needed. Contributions to a Roth can be withdrawn at any time without owing tax or a penalty. Money you contribute to an HSA account can be used to pay for medical expenses today, or in retirement.

Retirement savings options to consider if you’ve got income from freelance side-gigs, or if you’re a full blown self-employed entrepreneur.

  • Roth IRA. Individuals with modified gross income below $120,000 and married couples filing a joint tax return with less than $189,000 in income can contribute $5,500 to a Roth IRA in 2018. If you’re at least 50 the limit is $6,500. There’s no upfront tax break on your contribution, but in retirement all withdrawals from a Roth IRA will be 100% tax free. A feature that should help with your peace of mind, is that you can withdraw your contributions (not your earnings) at any time and not owe any tax, or any early withdrawal penalty. To be clear, it’s not ideal to raid money earmarked for retirement, but in a bona fide emergency, it’s nice to know your Roth IRA can do double duty as a back-up emergency account.
  • You may be able to leverage your health insurance plan into a nifty stealth retirement strategy by signing up for an HSA. If you’re buying your own health insurance, you don’t need to be reminded how costly that expense is. If you haven’t yet considered a High Deductible Health Plan (HDHP) you might want to give it a look-see, as it can reduce your health insurance premium costs and jump start your retirement savings.

The obvious consideration with an HDHP is that you need to be able to shoulder the expense of a higher deductible. Ideally, you want to have that money tucked away in a savings account.

Once you’re enrolled in an HDHP you are eligible to contribute to an HSA. An HSA offers an unbeatable triple-tax break. Money you contribute is tax deductible in the year you make the contribution and grows tax-free.  You can make tax free withdrawals at any time pay for qualified medical expenses – such as your out of pocket expenses until you meet the deductible.

Or, you can also let money in your HSA account grow untouched for as long as you want. Then, in retirement, any money you withdraw to pay for medical expenses will be 100% tax free. (Quick tip: Yes, Medicare will cover plenty, but not all of your medical costs. Out-o- pocket medical costs over a long retirement will stretch into six figures for most households.)

  • SEP-IRA. If you are able to save more than the $5,500/$6,500 annual limit on a Roth IRA, or your income is too high to qualify for a Roth IRA, a SEP-IRA is the go-to freelancer’s retirement plan. (SEP is short for Simplified Employee Pension Plan). You are allowed to contribute up to 25% of your gross salary each year, up to a limit (for 2018) of $55,000. There is no Roth option with a SEP-IRA. Money you contribute can be claimed as a deduction on your federal tax return, and in retirement all withdrawals will be taxed as ordinary income.
  • Solo 401(k). These are a bit more complicated to set up and manage than a SEP-IRA, but an added benefit is that if you want to have tax-free withdrawals in retirement, you can open a Roth Solo 401(k).

The key to retirement success is save consistently. Having good intentions won’t get the job done. The smart move is to set up automatic contributions — once a month, one a quarter – into your account. Every discount brokerage offers these retirement accounts, and will be happy to set up a free ongoing transfer from a bank account into your retirement account. That will make running your own retirement plan a snap.

If you need more help with health account decisions, check out our blog. We will make you a healthcare benefits expert in no time, without any extra work or effort on your end.

Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.