Now more than ever, workers are learning what it means to be on their own. Rather than having an employer for life, many companies simply bring on workers for short-term contracts, leading to the rise of what is known as the gig economy.
Being a worker has lots of challenges. But when it comes to retirement savings, it also opens up some options that most regular employees don't have. Particularly, the multiple ways you can save for retirement will be able to increase your savings dramatically – as long as you are earning it back.
The 5 ways to save as a worker
Typically, gig workers have five things they can do for retirement:
- Use a regular taxable brokerage or mutual fund account
- Make contributions to an IRA
- Open a SIMPLE IRA account
- Find a provider for a SEP IRA
- Create a self-employed 401 (k) or solo 401 (k) plan for your retirement
We ' Using regular non-tax-favored accounts
Anyone can use a simple brokerage or mutual fund account to save. Doing so gives you maximum flexibility, because there are any restrictions on how you can invest when you get access to your money.
The downside of regular accounts is that they have the tax benefits that other savings vehicles have. In particular, you will have to pay tax on your income, and when you sell at a gain, you will immediately have to pay tax on the capital gains. Depending on how you structure your portfolio, the tax disadvantages are huge, but it's still something you have to keep in mind in weighing your options.
Contributing to a regular IRA
The money that gig workers make counts as earned income, letting you open an IRA. They are $ 5,500 for those under 50 or $ 6,500 for those 50 or older. 2019 contribution levels rise to $ 6,000 and $ 7,000, respectively.
IRAs let you either deduct your initial contributions for traditional accounts or get tax-free growth through retirement for Roth accounts. However, there are restrictions on taking the money out of an IRA, with penalties and taxes applying if you are too early without qualifying for an exception. With a wide range of investments available, though, IRAs are quite flexible while giving valuable tax benefits.
Keeping things SIMPLE
Despite their name, SIMPLE IRAs are different from regular IRAs. SIMPLE IRAs are special accounts that small businesses can use to help workers save for retirement. They're also available to gig workers and other self-employed individuals.
Establishing a SIMPLE IRA is pretty simple, as most financial institutions have the paperwork necessary to do so. One thing about the accounts is that they have relatively high contribution limits – $ 13,000 in 2019 for those younger than 50, and $ 16,000 for those 50 or older.
Using a SEP IRA
Once your gig earning a high, a SEP IRA can let you boost your retirement savings dramatically. SEP stands for simplified employee pension, and its contribution amount to one-quarter of your net compensation over the course of the year. That's subject to an overall maximum limit, but for 2019, that number is $ 56,000 – you can get from most retirement savings vehicles.
There's some added complexity with SEP IRAs for self-employed employees, because the definition or net compensation includes having self-employment taxes. But once your income gets above $ 65,000 to $ 75,000, the greater savings available from a SEP IRA compared to a SIMPLE or regular IRA really start to show up.
Opening a solo 401 (k)
The most extensive retirement plan a gig worker can open is the solo 401 (k). This is a simplified version of the same 401 (k) plans that many large employers offer. For 2019, that lets you contribute up to $ 19,000 if you're younger than 50 and up to $ 25,000 for those 50 or older. In addition, you can also add on the same employer contribution as SEP IRAs – essentially giving you the best of both worlds.
The downside of solo 401 (k) is that they involve even more paperwork than any of the other methods discussed above. You can make it through all the paperwork, though, and once your earnings reach the top, in solo 401 (k) make it easier than ever before your available retirement savings in a tax-favored way.
Be smart with your retirement
If you're a good worker, saving as much as you can is smart. These five savings methods give you a nice range of choices to fit any situation, and all of them can get closer to reaching your financial goals.