How to Plan for Retirement in a Gig Economy

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By Cristina Wiebelt-Smith, CPA, Associate Wealth Advisor

“Gig economy” is a fairly new term that refers to short-term, flexible jobs for freelancers and independent contractors instead of traditional, full-time employees.

The term may be new, but it’s a lot like being self-employed. With the pandemic, more and more people are leaving their traditional jobs and starting their own businesses. Businesses like hiring gig workers because they save money on benefits, payroll expenses and retirement costs.

There are also benefits for workers in this gig environment: flexibility, variety and control over their time. This also comes with taking on more responsibility and more initiative. There isn’t an HR department that hands you a sheet of health care options and retirement plan options – YOU are the HR department.

Again, this comes with a lot of flexibility, but taking the first step is huge. Health insurance and taxes are the first two areas people usually have questions about.

For health insurance, the Health Insurance Marketplace income limits have changed over the years, so don’t assume you make too much to take advantage of this program. There are also alternatives like Christian Sharing networks, in addition to the traditional insurance companies.

For taxes, save, save and save more until you know what the first year will look like. Remember that you are now the employee and the employer, so you need to set aside 15.3% of your net profit for payroll taxes, and then set aside federal and state income taxes as well. Consulting with a good CPA during that first year is a must, so that you have an idea of what to expect on April 15.

Retirement is the third area to think about, and one that is easily put on the back burner. There are several reasons for this, which I’ve seen first-hand over my years of working with business owners.

  • The owners invest profits back into the business to keep it afloat and then to grow it.
  • Some entrepreneurs think of their business as their retirement plan. The business may be your nest egg, but do you want to put all the eggs in one basket? Will you be able to get a seller during the timeframe you want to retire? Will you be able to get the sales price you need to fund your retirement? It usually takes longer than people anticipate to find the right buyer, get a valuation, complete due diligence, negotiate and draw up the paperwork.
  • In the gig economy, there might not be a business to sell. Maybe you are an IT consultant or a voiceover artist – your knowledge and talent are your assets.
  • Entrepreneurs are busy! They finish one project and move on to the next, looking for more work and more clients.
  • It seems overwhelming and you don’t know where to start. My sister says this happens a lot with her attorney friends. Most of them are small practitioners, always running to court and meeting with clients. They don’t want to spend time looking at retirement plans.

 

You are the only one who can save for your retirement, so we’re going to give you a list of several possibilities, some basic rules for 2021 and a call to action:

  • SEP Plans – You can contribute up to 25% of your self-employment income or $58,000, whichever is less. You can decide each year how much, if anything, you want to put into the SEP.
  • Simple IRA – You can contribute up to $13,500 per year, plus an additional $3,000 if you’re age 50 or older.
  • Solo 401(k) – Similar to a traditional 401(k) you may have had with an employer, except it covers only the business owner or the business owner plus their spouse. You can contribute up to 100% of your compensation up to a limit of $19,500, plus an additional $6,000 if age 50 or older.
  • Roth IRA – You can contribute up to $6,000 each year, plus an extra $1,000 if you’re age 50 or older. Once your income hits $198,000 married filing jointly on your tax return or $125,000 if you are single or head of household, the amount you can contribute starts to decrease.
  • Traditional IRA – You can contribute up to $6,000 each year, plus an extra $1,000 if you’re age 50 or older. Contributions may be deductible depending on your income level and if your spouse is eligible for a retirement plan.

 

Remember: These are basic rules and do not include details on what to do if you have employees and how they must be handled under these plans.

This week, ask your CPA or a financial planner about these plans and what makes sense for you. Whatever you do, ask before the end of the year, because contributions to several of these plans may come with a tax deduction – so, by saving for your own retirement, you also get to keep more money in your pocket.

Time can be your friend or your enemy – make it your friend! If you want to see what saving $100 a month looks like at age 65, or how much you need to save if you want to retire at 60, 65 or 70, we have the technology to illustrate that. At Gertsema Wealth Advisors, we empower clients to make life’s decisions on their terms.

 

 

 

This piece is not intended to provide specific legal, tax, or other professional advice. For a comprehensive review of your personal situation, always consult with a tax or legal advisor.

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