My ticket to freedom arrived in an ordinary-looking envelope mailed from a New Jersey state government office. It confirmed that I had established my very own limited liability company, and I gave a little yelp as I pulled out the form. I was officially my own boss—and it felt great.
Soon after, though, I realized that I had left something important behind at my old job: easy access to a retirement savings program. When I started looking into my options for replacing that benefit, I was on my own in a different way—and it didn’t feel nearly as good.
Independent workers do have retirement saving options, but I soon learned that researching those options and opening those accounts was a solitary undertaking. If you don’t feel savvy financially, it can also be confusing and intimidating.
The result? Relatively few independent workers take advantage of the retirement saving options specifically designed for them.
Sure, some 54% of independent workers appear to be saving in some kind of tax-advantaged retirement account, says Catherine Collinson, CEO and president of the Transamerica Institute and the Transamerica Center for Retirement Studies—which is close to the share of employed workers saving through workplace programs.
However, the majority of these independent workers are only using traditional and Roth IRAs. Just 14% of them are saving in a Solo 401(k), and even fewer are saving in a SIMPLE IRA or a SEP IRA (more on these later!).
“It raises the question of whether people know if these other options even exist,” Collinson says.
That lack of knowledge is affecting millions. The number of gig and independent workers in America has been growing for years, and the COVID-19 pandemic only accelerated the process.
Growth of the Gig Workforce
In March 2022, the employment website Indeed surveyed 1,001 women about their reasons for shifting from full-time employment to gig work, contract work, part-time work or no-pay work, and 83% said they craved greater flexibility.
“I know a lot of moms, particularly Black women, who end up starting their own business because they need flexibility, and work environments are the pits,” says Lazetta Rainey Braxton, a certified financial planner, co-CEO and cofounder of 2050 Wealth Partners, and CEO and founder of Lazetta & Associates.
The trick is figuring out how to take care of ourselves both now and in the future. And it’s not easy.
Retirement Saving Challenges
Not only are women more likely than men to work part-time, which means they may not be eligible for an employer’s retirement plan, but they are also more likely to work for small businesses—many of which provide little or nothing in the way of retirement benefits. Furthermore, one in four women are not offered any retirement benefits by their employer, nearly double the percentage of men, according to another study by the Transamerica Center. On top of all that, women tend to spend more years out of the workforce caring for family.
Independent workers have added challenges. We are often busy doing all kinds of things besides getting our work done—including serving as our own IT department, payroll, office-supply coordinator and more.
“A lot of my clients come to me a couple of years into their business and they haven’t done anything about retirement,” says Ruchi Pinniger, founder and CEO of Watch Her Prosper and a financial guide for female business owners. “It’s pretty easy to get overwhelmed when you start to look at the options.”
In addition, it can take time to achieve a comfortable income as an independent worker and, unlike a steady paycheck, cash flow for independent workers can vary widely from month to month. That can make it hard to save consistently. For gig workers who are trying to build a business, saving for retirement must be weighed against investing in their new enterprise.
But retirement saving is an essential component of financial well-being, right after emergency savings. That’s why it pays to understand your options and take action. Read on to find the type of plan that will work for you.
Individual Retirement Account (IRA)
Best for: Everyone, even if you’re already contributing to an employer-sponsored 401(k)
IRAs have been around for decades, and they are among the most well-known retirement saving options—for good reason. IRA accounts are easy to open at a bank or brokerage, and the rules around them are pretty straightforward.
With a traditional IRA, you make contributions yourself, up to a maximum of $6,000 per year (or $7,000 if you are 50 or older). You can invest your savings in anything from stocks to bonds to annuities, and you will not pay taxes on the investment gains until you withdraw the money in retirement. Depending on your situation, you may also be able to deduct some or all of your contribution when you file your taxes.
Although the contribution limit for IRAs is much lower than for 401(k) accounts or for other independent worker options, your savings can still add up. If you contribute $6,000 every year for 20 years and invest the money so it earns an average of 7% annually, you will end up with roughly $260,000. That won’t cover all your needs in retirement, but it can certainly help.
An alternative to a traditional IRA is a Roth IRA. If you earn less than $144,000 in 2022 ($214,000 if you are married and file taxes jointly), you can contribute to a Roth. You don’t get a tax deduction in the year you contribute, but your investment gains grow tax free. And you don’t pay taxes when you withdraw the money in retirement.
Younger workers “should be throwing everything at Roths when they are just starting out,” says Claire Toth, managing principal and senior wealth strategist at Peapack Private Wealth Management.
Roth IRAs are great if you think you’ll stay under the income cap for a while. They can also be a way to build retirement savings with a different tax treatment than some of your other accounts, which can help you manage your finances after you retire.
Simplified Employee Pension (SEP) IRA
Best for: Solopreneurs and part-time or full-time independent workers
A SEP IRA allows you to contribute more than you can in an IRA—up to 25% of your income or $61,000, whichever is less. In addition, you have as many investment options as you do with an IRA.
A SEP is simple to set up at a bank or a brokerage firm. And, like a traditional IRA, your contribution (as an employer) may be tax-deductible, you are not required to contribute every year and your investment gains will not be taxed until you withdraw money in retirement. You can even set up a SEP for your side gig and contribute to your employer’s retirement plan.
One thing to be aware of with a SEP is that these plans are best if you are self-employed or have few or no employees. If your business grows to the point where you have employees who the IRS considers eligible to participate in your plan, you will have to contribute the same percentage of the employee’s compensation as you contribute for yourself.
Best for: A business owner with no employees
Even if you have left your corporate job behind, you can still have a type of 401(k)—if you have no employees. (Spouses are an exception to this rule.) With this account, you get to contribute both as employee and employer.
As an employee—even of yourself—you are eligible to contribute up to 100% of your income or the maximum allowed by the IRS (in 2022: $20,500, or $27,000 if you’re 50 or older), whichever is less. Then, as the employer, you are allowed to make an additional profit-sharing contribution that is equal to as much as 25% of your compensation up to the combined limit on contributions (which is the same as for a SEP IRA: $61,000 for 2022, or $67,500 if you are over 50).
Your contributions as the employer may be tax-deductible to your business. Remember, though, that if you have this plan for a side hustle and you are still contributing to a workplace 401(k), you’re still just one taxpayer. The combination of all your contributions cannot exceed $61,000 (or $67,500 if you are over 50).
Solo 401(k)s will require more time and expense to set up than a SEP IRA, and if you hire full-time employees, you will have to terminate your plan or convert it to a traditional 401(k). But these plans can be a great option if you are a solopreneur, value the tax benefits or want a lot of investment options.
Savings Incentive Match Plan for Employees (SIMPLE IRA)
Best for: Small businesses with no more than 100 employees
By now you may be thinking, “None of this is simple!” But truly, a SIMPLE IRA does have many simple features. If you have a small business with 100 or fewer employees, a SIMPLE IRA can be a good plan for you.
These accounts are easier to set up and administer than solo 401(k)s. One downside, though, is that employee contribution limits are lower: $14,000, or $17,000 for those 50 and up. Another drawback for you as the employer is that these accounts require employer contributions, either as a match of some part of the employee contributions or as a flat percentage of an employee’s compensation.
How to Choose
Clearly, you have a wide array of choices. That’s great—but it can also keep you from getting started. That’s why most experts recommend that you consult with a specialist.
“As an entrepreneur, you put your passion and resources into creating your business,” says Barbara Bilello, a partner and wealth advisor at RegentAtlantic. “Let somebody else grab your financial wheel and help you make these choices.”
The Certified Financial Planner Board of Standards offers a list of advisors who have a fiduciary responsibility to put your best interests first. So does the National Association of Personal Financial Advisors. If you want to learn more on your own, the IRS website has clear explanations of the different types of plans. NerdWallet and Investopedia can also be good resources, as well as my book: You Are Worthy: Change Your Money Mindset, Build Your Wealth & Fund Your Future.
“If people do this in bite-size pieces, it will start feeling like common sense,” Braxton says. Think of it this way: If you are capable of becoming your own boss, you’re capable of figuring out a retirement savings strategy.
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