With our trusty laptops in hand, and potentially frozen cocktails in the other, there aren’t many things that can bring us down. Sure, paying self-employment taxes as a freelancer can be a pain and deciding if you need business insurance as an independent consult is a tough call. But all things considered, life could be worse — except, oh shoot, what are we doing about retirement?
A lot of professionals new to consulting work, while they were employed, were used to the employer match adding to their retirement savings and to the tax advantages of that and their own contributions — usually through a 401K. Then when they are self employed, they are not sure how to keep saving for retirement at the same pace.
In fact, though tons of studies show that freelancers strongly prefer the gig economy lifestyle, the biggest downside is concern about retirement. When asked what they mainly dislike about being a freelancer, according a survey by ReportLinker, the top reason — by 27 percent of respondents — is “no retirement benefits.”
Ironically, that’s not even factually correct. There is a retirement option for freelancers that is comparable to an employer sponsored plan. SEP-IRAs are the low-hassle retirement savings tool you’ve been searching for!
If you haven’t considered how a SEP-IRA can supplement a personal IRA, it’s in your best interest to learn a little more about it.
Less upkeep and risk of charges
The SEP in SEP-IRA stands for Simplified Employee Pension. We solopreneurs really like that simplified part. The SEP-IRA is a type of traditional IRA for anyone with freelance income (or any business owner with one or more employees) and, according to CNN Money’s Ultimate Guide to Retirement, “may be your best bet if you are a one-person show and plan to keep it that way.”
Former MSN correspondent Kristin Wong sheds some light on how these useful protections can be more advantageous than the standard IRA in a recent blog for Get Rich Slowly.
“If you’re not contributing regularly to this account [IRA], there’s a chance that the IRS can tax and penalize you. With the SEP, it’s up to you when and how much you want to contribute. Another administrative responsibility of the Solo 401(k)? If your plan assets exceed $250,000, you’re required to file IRS Form 5500 annually.”
The gist is this — SEP-IRAs are a responsible choice for consultants and will give you less to worry about.
A SEP-IRA lets you save bigger and smarter
While all retirement savings plans have ceilings for annual contributions, most of them do not give penalty-free flexibility to grow your savings in the way SEP-IRA does.
Unlike traditional and Roth IRAs, which limit yearly contributions to $5,550, SEP-IRAs allow you to contribute up to 20% of your net-adjusted self-employment income. On top of this, like the more mainstream retirement savings plans, SEP-IRAs have tax deductible and tax deferrable versions that parallel the traditional and Roth IRA models.
Even better, you contribute both the $5,550 limit to your personal IRA and the limit (which is based on your earnings) to a separate SEP-IRA, much like as an employee you could have your personal IRA and also contribute to your workplace 401K plan. Essentially, the SEP-IRA fills in for the 401K and treats you as both the employer and an employee of your business.
These factors all can make a big difference over time. Contributing editor for the Simple Dollar Holly Johnson drafted up a neat case study in a recent post that quickly illustrates the usefulness of a SEP-IRA plan for the independent contractor. Here’s a little food for thought — if you net $100K, through this plan you can put $18k away for the year.
They’re very easy to set up and have fewer hoops to jump through
Lastly, the ease of setup for SEP-IRAs is hard to beat. For one thing, they’re relatively “turn-key” friendly. You can set one up online via numerous providers and without contact with the IRS.
Additionally, they’re open to just about anyone making money with at least a side hustle. Even if you are employed full-time but making income via a freelance consulting practice you can reap these benefits without worrying about any interference with your pre-existing IRA.
And on top of this, SEP-IRAs offer solos a great deal of flexibility in their set up. If you love putting everything off for as long as possible, then you will love the fact that you can open one at any time leading up to your tax filing deadline.
Sound up your alley?
While the advantages of SEP-IRAs are many, a retirement plan is still a serious enough matter that you do not want to open one simply because it’s a quick job. It’s worth learning more about them and weighing your options between an IRA, SEP-IRA, or a combination of the two. But all things considered, end of your employment-based 401K doesn’t mean the end of tax-advantaged retirement savings!
Related reading: Freelance Finances: Manage Your Income Like A Thriving Artist