You can be a contractor, desk hopper, freelancer, or something else. As a hustler and a self-employed person, you must always consider growing your business and earning more clients. Do you spare some thoughts about your retirement saving as well? No matter what, you have multiple risks already running on you because of unpredictable income and confusion about choosing a retirement account(s). How do you figure out where to put your money, which also works as a wealth generation opportunity? Let’s get into some nitty-gritty to solve your concerns.
Money to Save as a Freelancer
First, you must know to establish what you will save. The general guideline says 10-15% of earnings should go to a retirement plan. This tip is suitable for people with predictable payments. They get their paycheck, do some maths, and are done! Since they have a specific retirement saving target, it is a routine thing for them. Self-employed people need to be wary because their payments vary. To simplify things, you can target 10-15% of saving annually rather than calculating it per paycheck. Once you determine this, chipping away some of your income will feel easy. You can add more when your cash flow improves to make up for leaner months.
A few techniques to figure out how much money to save
If you are still worrying about the account type, you can visit solo401k.com for your satisfaction. However, sort out your savings target for a plan. For an idea, start with your previous year’s tax return files. Look at your gross income – what remained with you after adjustments and deductions. You can take a cue from these figures to settle your 10-15% savings goals. Suppose it was USD $100k last year. In that case, you may want to save USD $ 10-15k this year. Once you get a certain amount in mind, it becomes easy to tweak your monthly fund contributions per situation. Some study their six months of salary slips or pay stubs to understand what they saved after paying estimated half-yearly taxes. Multiply the amount by 10-15% to pursue the result as your target for the upcoming six months.
A solo 401(k) plan for self-employed
One regret most people face is the loss of 401(k)s benefits after they leave their jobs for self-employment. However, the main reason for such a feeling is the limited knowledge about options. If you were unaware, you must know independent contractors or freelancers can open a solo 401(k) account. One can contribute up to USD $66,000 in 2023. For 2022, it’s USD $61,000. And the best part about this plan is your ability to add an amount as an employee and an employer. You can contribute USD $22,500 as an employee and 25% of your income as an employer. For the latter part, you can refer to IRS’s instructions about calculations.
So, there is a retirement plan you can trust. But experts recommend you can use multiple retirement accounts to optimize your savings. For instance, you can have a solo 401(k) and IRA. Or you can also have a Roth IRA. The options are wide-ranging. With proper knowledge and understanding, you can make your self-employment journey safe for your retirement age. If you need help, reach out to financial advisors to improve your financial future.