Savings Options for the Self-Employed Millennial
Millennials who pursue self-employment know there are lots of perks to being your own boss. You can make your own hours, set your own dress code, and decide where and when you will work. However, there is a downside. As a self-employed Millennial, you do not get a retirement savings plan through your employer.
Even though this benefit is not provided to you, you should still be saving for financial independence to the degree you can afford to. You might love working long hours right now—many Millennials hustle all day. At some point though, you may want to cut back on work and enjoy other things.
Even if you don't feel confident about your retirement savings now, there are things you can do starting right now if you’re self-employed that will help you save for your financial future. Keep in mind, you may actually need to save more because you don’t get the benefit of a company-matching contribution. (For more from this author, see: How Retirement Planning Differs for Millennials.)
Here are some common retirement savings plans for those that are self-employed.
Traditional or Roth Individual Retirement Account (IRA)
- Contribution limit: $5,500 a year ($6,500 for those over 50) for 2018
- Contribution deadline: Tax filing deadline
Both traditional and Roth IRAs are a common starting place to save for retirement outside of workplace-provided plans. With a traditional IRA, contributions are made pre-tax; Roth contributions are made after-tax. These accounts are generally easy to open and maintain and may cost less than more complicated plans to run.
- Contribution limit: lesser of 25% of W-2 pay or $55,000 for 2018
- Contribution Deadline: Tax filing deadline plus extension if applicable
A SEP IRA allows you to contribute much more to retirement savings than an IRA if you have enough income. The formula can be a little more complicated for figuring out a contribution limit, but a good accountant can help with that piece. The deadline for contributions also means you can put some money in during the current year and then work with your accountant come tax time to see if you can add more before filing taxes for that year. It’s helpful to have the flexibility if your business is one that has sporadic income. That one big job that comes through at the end of the year can change things quickly. (For related reading, see: Business Owners: How to Set Up a SEP IRA.)
Solo 401(k) or Individual 401(k)
- Contribution limit: $18,500 as “employee,” additional 25% of compensation as “employer,” for a total maximum of $55,000
- Contribution deadline: Employee contributions must be done by the 15th of the month following deferral; “employer” contributions by tax filing date plus extension if applicable
The individual 401(k) is one of the more robust ways to save for retirement as a self-employed person. It has a higher contribution cap based on income than the SEP IRA. It may be a little more difficult to establish and may cost a little more, but the higher contribution limits may be worth it for some people. It does need to be established by December 31 of the year for which contributions will be made, so you can’t open one for the prior year come tax time if you decide you can put away more money.
As a self-employed Millennial, you have several options for saving for retirement. Do your research to determine which option is best for you. You are investing a lot of your time and energy into creating a career path that works for you. Make sure you put as much time into taking care of yourself and your future outside of work. (For more from this author, see: 6 Reasons Millennials Should Buy Life Insurance.)