Are you considering freelancing full time?
You’re in good company. The lack in job security through all sectors has pushed many professionals to go the solo consulting route.
And why not?
There’s no guarantee of a job tomorrow and running your own business gives you complete control of your income. Though the benefits of solopreneurship including freedom and unlimited compensation are attractive, how independent contracting fits into retirement planning is an important aspect to consider.
Is it possible to build a secure nest egg without the standard 401(k) match?
Yes. You can retire after living life on your own terms while building a business – if you plan sooner and smarter.
Picture Your Ideal Retirement
Do you envision putting work aside 100% for the golden years? Or do you see yourself freelancing part-time to keep occupied?
Not everyone views retirement the same way, especially freelancers and solopreneurs who leave the corporate world for solo work they enjoy. Don’t quit cold turkey when you find life purpose in your work.
That doesn’t mean that you shouldn’t save anything. If you know you’re the type to enjoy a work life balance in old age include that income in your retirement calculation (or try these calculators) and make sure your total portfolio can sustain you for about 30 years (with occasional long gaps in paid work).
Choose a Retirement Plan
Solo 401(k) – The typical 401k plan except for a business with no employees and covers yourself and your spouse – if he/she earns income from your business. It comes in both traditional and Roth options like with IRAs (see below).
In 2017, $18,000 is the maximum amount of pretax money you can contribute with an additional $5,500 permitted for people 50 and older. You can also add 25% of your annual compensation for non-elective contributions maxed at $54,000. You are able to borrow from your savings with a Solo 401(k). This option is beneficial for businesses with significant income because of the high contribution limits.
IRA & Roth IRA – And of course we have to add the good old IRA and Roth IRA. Both the IRA and Roth IRA are retirement saving accounts that can be set up by individuals with one main difference.
The traditional IRA grows deferred with taxes due at withdrawal while the Roth IRA grows tax free. You put money into the Roth IRA after-tax to avoid paying it in retirement.Consider your tax bracket when deciding between a IRA and a Roth IRA. If you plan to be in a larger tax bracket in the future a Roth IRA may be the way to go – pay less taxes now while you can!
Another difference between the two accounts is flexibility. You may withdraw from a Roth IRA account before retirement (penalties may apply). You can also keep money in the Roth IRA for as long a you want, where the traditional IRA requires you to make minimum withdraws at age 70 1/2. The maximum contribution for 2017 on both the IRA and Roth IRA is $5,500 and $6,500 if 50 or older.
Simplified Employee Pension IRA (SEP IRA) – An option for solopreneurs that may consider bringing on staff and want to contribute a larger sum than the IRA and Roth IRA allows. With the SEP plan you can put up to 25% of net earnings in retirement accounts for yourself and your employees – not to exceed $54,000 in 2017.
This plan is one of the more easy and inexpensive plans to set up. You must give employees the same contribution amount and the contributions can be changed each year. You may withdraw from SEP accounts but they are subject to 10% tax if you’re under the age of 59 1/2.
And Open One… Now!
As long as you don’t make this one mistake you can build yourself a comfortable retirement while freelancing when you decide to take the leap.
Let’s be real. The first few years building a business can be tough. You probably won’t make tons – or any – money right away. So naturally you decide to wait until all the stars align before contributing to retirement account.
Not a good idea. If you’re like most of the human race nothing ever falls perfectly into place. Building savings endurance now to carry on into the future when you see real success is the ticket to being prepared to retire. After all it’s a marathon, not a sprint.
For ways to max out your retirement and having a comfortable one check out these articles.
Join our newsletter
If you like Critical Financial, subscribe and get our latest content via email.