If you work in the gig economy and you want to save for retirement – and reduce your income taxes at the same time – you need to start saving for retirement. Not only will it enable you to direct some of your gig income into retirement savings, but you may be able to get a tax benefit as well.
And even if you don’t get a tax deduction for the contribution, investment earnings accumulate in retirement plans on a tax-deferred basis. This means you can invest aggressively, earn high returns, and not be concerned with paying any tax on that income.
Let’s look at four plans for saving for retirement when you are self-employed and working in the gig economy.
Traditional or Roth IRA
IRAs are simplest type of retirement plan possible, and you can contribute up to $6,000( $7,000 50 or older) in 2019.
With a traditional IRA, you can generally deduct the amount of your contribution as long as you have sufficient earned income to cover the contribution amount and are within specific income thresholds. However, having a side gig in combination with a full-time job may change whether or not you can deduct your IRA contribution.
A Roth IRA works like a traditional IRA except that contributions are not tax-deductible. The benefit is that your disbursements after age 59 ½ are tax-free. But even without the tax deduction, it’s still a way to save for retirement and generate tax-deferred income. Like the traditional IRA, the Roth IRA also has income limits. The key difference is that if you exceed those limits, a Roth IRA contribution will not be permitted at all.
The SIMPLE IRA has two advantages over a regular IRA:
- Contribution limits are much higher, at $13,000 ($16,000 50 or older) in 2019.
- You can open a plan for your gig venture and make tax-deductible contributions, even if you are covered by a plan at your primary job.
Just like a regular IRA, it can be set up as a self-directed plan where you pick where you want to invest. Again, like a regular IRA, you can contribute up to 100% of your side gig income to the plan, up to the contribution limits.
A Solo 401(k) plan works just like an employer 401(k) plan, except it’s for one self-employed person. You can set up a plan for your side gig.
The Solo 401(k) has very generous contribution limits, at $19,000 ($25,000 50 or older) in 2019.
And that’s just the “employee” portion. With a Solo 401(k) plan for a self-employed person, you act as both employee and employer. You can contribute 100% of your income to the plan as an employee, up to the employee contribution limit. But you can also contribute up to 25% of your income as an employer contribution.
What’s more, you can have a solo 401(k) plan in place even if you have a retirement plan through your primary job. However, the contributions to both plans cannot exceed the total limits for a single plan. For 2019, that’s $56,000 including both the employee and the employer contributions.
Simplified Employee Pension (SEP) IRA
The SEP IRA is last on this list because it offers a very high contribution (and tax deduction) if you are a high income earning individual. The limit is calculated as a percentage of your earnings. This means that if your side gig is just getting off the ground, the nominal limit may be much lower than the others on this list.
The maximum contribution you can make to a SEP IRA is 25% of your net business income up to $56,000 for 2019.
You can have a SEP IRA in combination with a plan from your primary employer. But once again, your total contributions to the two plans can’t exceed the contribution limits for a single plan ($56,000).
Choose One Plan and Open an Account
Obviously, most people who work in the gig economy are looking to earn an additional income. But one of the best uses for that income is to supercharge your retirement savings. You can do that, and also get a tax deduction, by tying a plan to your side gig.
If working in the gig economy is a full-time occupation, you absolutely need to take a close look at opening one of these plans. Since you have no employer-sponsored plan, you’ll need to create your own. And fortunately, with the four choices above, you’ll have plenty of options.
You also may be able to reap the benefit of the Saver’s Credit worth up to $1,000 single($2,000 married filing jointly) just for investing in your retirement.
Don’t worry about knowing these tax rules. TurboTax Self-Employed will ask you simple questions about you and your business and give you the tax deductions and credits you’re eligible for based on your answers. If you have questions, you can connect live via one-way video to a TurboTax Live Self-Employed CPA or Enrolled Agent with an average of 15 years-experience to get your tax questions answered. TurboTax Live Self-Employed CPAs and Enrolled Agents are available in English and Spanish year-round and can even review, sign, and file your tax return.