More than ever, workers are learning what it means to be alone. Instead of having an employer for life, many companies simply hire workers for short-term contracts, leading to the emergence of the so-called gig-economy.
Being a gig worker has many challenges. However, when it comes to retirement provision, this also opens up some options that are not available to most regular employees. In particular, the many ways you can save for retirement, you can dramatically increase your savings - if you have sufficient income.
The 5 ways to save as a gig worker
Typically, gig workers have five things they can save for retirement:
- Use a regular taxable brokerage or investment fund account
- Contribute to an IRA
- Open a SIMPLE IRA account
- Find a provider for a SEP IRA
- Create an Independent 401 (k) or Solo 401 (k) Plan for Your Retirement
We'll go over the pros and cons of these options below.
Use of regular non-tax-deductible accounts
Anyone can use a simple brokerage or mutual fund account to save. This gives you maximum flexibility as there are no restrictions on how you can invest or when you can access your money.
The disadvantage of regular accounts is that they do not have the tax benefits that other savings instruments have. In particular, you must pay taxes on your income when you earn it, and if you sell an investment for a profit, you must immediately tax the capital gains. Depending on how you structure your portfolio, the tax disadvantages are not always great, but you must consider this when weighing your options.
Contributions to a regular IRA
The money that giglers earn counts as earned income and lets you open an IRA. The contribution limits for the 2018 tax year - which you can still make up to April 15 - are $ 5,500 for those under the age of 50 or $ 6,500 for those aged 50 or over. The contribution level of 2019 rises to 6,000 and 7,000 dollars.
For IRAs, you can either deduct your initial contributions for traditional accounts or grow tax-free by retiring for Roth accounts. However, there are restrictions on withdrawing funds from an IRA. Penalties and taxes are applied if you do this too soon without qualifying for an exception. However, with a wide range of available investments, IRAs are quite flexible and offer you valuable tax benefits.
Keep things simple
Despite their name, SIMPLE IRAs differ from regular IRAs. SIMPLE IRAs are special accounts that allow small businesses to help workers save for retirement. They are also available to giants and other self-employed.
Setting up a SIMPLE IRA is fairly easy as most financial institutions have the necessary documentation. One nice thing about the accounts is that they have relatively high contribution limits - $ 13,000 in 2019 for under-50s and $ 16,000 for over-50s. In general, you also have access to a wide range of investment options that allow you to track your own investment strategy to save for retirement.
Using a SEP IRA
If your revenue is high, using a SEP IRA can dramatically increase your retirement savings. SEP stands for simplified employee benefits and its contribution limits amount to a quarter of your net remuneration during the year. The limit is a total, but for 2019 it's $ 56,000 - well above what you can get from most pension insurance vehicles.
For SEP IRAs, there is a certain amount of complexity for the self-employed, as the definition of net compensation requires that taxes on self-employment be calculated. However, once your income exceeds $ 65,000 to $ 75,000, the greater savings will be in a SEP-IRA compared to a SIMPLE or a regular IRA.
Open a solo 401 (k)
The most comprehensive retirement plan a gig worker can open is the Solo 401 (k). This is essentially a simplified version of the same 401 (k) plans that many large employers offer. For 2019, you can contribute up to $ 19,000 if you are under 50 and up to $ 25,000. In addition, you can also add the same employer contribution as the SEP IRAs allow - essentially the best of both worlds.
The downside of Solo 401 (k) is that they require even more paperwork than any other method discussed above. However, financial service providers accompany you through the entire paperwork. Once your earnings reach the top tier, you can use a 401 (k) product to better utilize your available retirement assets for tax purposes.
Be wise with your retirement
If you're a gig employee, it makes sense to save as much as possible. These five saving methods offer you a good choice for every situation and all can bring you closer to your financial goals.