401k vs. no 401k

Investing when you are freelance or self-employed can be a bit trickier then it was at a fulltime job with benefits.  Most employers offer their employees access to a 401k plan, which can simplify investing.  The contributions to the account come from your payroll checks, so there is no worry about forgetting to send in the amount of desired cash.  The investment choices are presented on a platter for you to choose from, versus the thousands of options that exist when doing your own investing.  Each 401k differs in the actual number of investments you can choose, but for most picking between a few is not an issue.

For many individuals a 401k represents the majority of the investing that they do.  A big bonus of 401k investing is that you can reduce your income by the amount contributed on a pretax basis.  As a freelancer or self-employed person you may not have access to an employer offered 401k plan, but may have access to a solo 401k plan.  A solo 401k plan allows a participant to make elective deferrals up to 100% of compensation or earned income.  For 2014 the annual contribution limit is $17,500 or $23,000 for those age 50 and over.  The solo 401k also has a profit sharing component which allows up to 25% of compensation to be added, until an annual maximum of $52,000 is reached.

Other Account Types

An IRA or Individual Retirement Account would be an option.  Normally when people refer to an IRA they are speaking of a Traditional IRA.  Although you have several types of IRAs, which include ROTH, SIMPLE, SEP, Rollover, and Inherited IRAs.  A Roth IRA is one that you contribute to on an after tax basis, so no income reduction.  Rollover IRAs are a type of Traditional IRA account which receives the assets from inactive workplace savings plans (401K, 457B, 403B).    Both SIMPLE and SEP IRAs are considered options for self-employed and small business owners.  An inherited IRA is one which is designed to receive the remains of an IRA or 401k account for the beneficiary of those assets (these have very specific rules about what is to happen with assets in these types of accounts).   

Here is a link to the IRS website, which goes into more detail about retirement plans offered for self-employed individuals http://www.irs.gov/Retirement-Plans/Retirement-Plans-for-Self-Employed-People.  The proceeding link provides descriptions of the accounts, contribution limits, and rules to be followed.

Getting Started

Speak to your broker or consider getting one if you do not have one.  Also a broker is the person or firm that you do your investing with.  Most brokerage firms do offer free investment advice.  So give them a call, explain your situation and see what plan can be put in place to help you get invested.  Lots of resources are offered by brokers to simplify investing, like access to online courses, research, and account features.  Some brokers even offer an online questionnaire that will help you choose the right type of retirement plan.  Several variables like age, income, filing status, and preference for a tax deduction will affect what plan is most appropriate.  It’s always a good idea to speak to a tax advisor when considering making changes to an investment portfolio.

According to a recent survey in part commissioned by the Freelancers Union, the number of Americans freelancing stands at 53 million.  That group of 53 million freelancers represents about 34% of the entire workforce.  As so many talented people pursue the paths of self-employment and freelancing it will continue to be of vital importance to be properly invested.





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