We hear a lot these days about how the gig economy is growing. According to the U.S. Bureau of Labor Statistics, more than 10.6 million Americans are working as independent contractors, on-call workers, or temporary employees. But while being part of the gig economy certainly has its benefits -- namely, not being locked into a schedule and having a shot at a better work-life balance -- the problem many independent workers face is having to navigate retirement savings on their own.
Whereas a large number of permanent employees have access to 401(k) plans through their employers, gig workers do not. As such, only 16% of gig workers have a retirement savings plan, which means millions of freelancers are putting their long-term financial security at risk.
If you've decided to work independently, you should know that there are several options at your disposal for amassing a retirement nest egg. Here are a few to look into.
The traditional or Roth IRA
Anyone who earns income is eligible to open an IRA. IRAs come in two main varieties: the traditional and the Roth. With the former, contributions are tax-deductible, but withdrawals are taxed in retirement. With the latter, you won't get an immediate tax break for funding your account, but your withdrawals in retirement will be yours free of taxes.
There are different schools of thought as to which IRA type is better, but whether you open an traditional account or a Roth, the annual contribution limits for this year are $5,500 if you're under 50, or $6,500 if you're 50 or older. That said, you can't contribute directly to a Roth IRA if your income exceeds a certain threshold, and for 2018, it's $135,000 as a single tax filer or $199,000 if you're married filing jointly.
The SEP IRA
A SEP IRA is an IRA designed for independent workers and small-business owners that allows you to save for retirement at much higher levels than traditional and Roth IRAs allow. This year, you can contribute up to 25% of your net business earnings for a maximum of $55,000. And by net business earnings, we're talking your gross income minus your expenses, SEP contribution, and half of your self-employment taxes. (Remember: As a gig worker, you don't have taxes removed from your earnings, so you're required to pay them as you go.) The only downside to a SEP IRA is that if you own a business and employ others, you must contribute the same amount to your workers' accounts as you do to your own. But if you work solo, that's not something to worry about.
The SIMPLE IRA
The SIMPLE IRA is another handy savings tool available to independent workers, and as is the case with a SEP, your annual contribution limits are much higher than those of traditional and Roth IRAs. Currently, you can contribute up to $12,500 if you're under 50, or $15,500 if you're 50 or older. If you own a business and have employees, you're required to match their contributions to a certain degree. And if you're working solo, you get to contribute as both employee and employer.
The Solo 401(k)
Just because you're not a permanent employee doesn't mean you can't open a 401(k). In fact, Solo 401(k)s work just like regular 401(k)s, only they come with higher annual contribution limits. For the current year, you can contribute up to 25% of your self-employment income up to a maximum of $55,000 if you're under 50, or $61,000 if you're 50 or older. When you calculate that 25%, you need to first deduct your self-employment taxes as well as your plan contributions to come up with the right figure. But if you're a higher earner, you have a great opportunity to sock away a nice sum of money in a tax-advantaged fashion.
Don't neglect your long-term savings
Working independently often means dealing with the challenges of having a variable income. But don't let that deter you from saving. Aim to contribute small amounts to your retirement plan initially and ramp up as your earnings stabilize. The more of an effort you make to save now, the greater your chances of retiring comfortably. And that's not something you want to compromise on.