Recent estimates indicate that close to thirteen percent of the United States workforce comprises of independent contractors. While these workers do not have any access to some of the benefits that come with traditional employment, e. G., disability and health insurance, they still have access to other important life options. One such option comes in the form of having a contractor retirement plan.
Fulltime employees will normally contribute to the sequestration schemes in their places of work. The schemes are formally known as the 401(k) schemes. Freelancers have a number of available options when it comes to saving towards their superannuation. Each plan comes with its own set of benefits and requirements, hence the need to understand each before making a selection.
A simple IRA is a saving scheme designed for the solo freelancer. It stands for Saving Incentive Match Plan for Employees and is a scheme that has been known to live up to its label. Freelancers can contribute either $12,500 and $15,500 per year. The latter is for independent workers who have already surpassed the fifty-year mark. Contributions to this scheme are in the form of pretax dollars.
Contributions made by members are used to manage their tax bills. Yearly contributions have in many cases been seen to $5,500. When you include catch up contributions, they add up to $6,500. This is the total amount that a solo freelancer can park in their accounts as savings at the end of each financial year.
SEP-IRA is the second superannuation strategy available to independent workers. SEP-IRA officially stands for Simplified Employee Pension Plan. Compared to the SIMPLE IRA, SEP-IRA is considered a high contribution limit. Freelancers are at liberty to contribute as much as twenty-five percent of their total pay with the maximum yearly contributions being $53,000.
If you look at this scheme from a tax perspective, you will note that it comes with very good news. All contributions made to this kitty occur in the form of pretax dollars. Nonetheless, you should note that catch-up contributions and elective salary deferrals are not acceptable in this type of saving scheme. Go through every detail keenly before making any strategic decision that might affect your future endeavors.
While it does have some attractive perks, it also has its downsides. For instance, whenever you make contributions to your account, you have to make sure that you make a similar contribution to accounts belonging to your employees. While the amount may vary from account to account, the percentage of the contributions has to remain constant. Therefore, if you make a ten percent contribution to your account, be sure that you make a similar contribution to your employee salaries. This should not be an issue if you work alone.
The solo 401(k)s is another retreat scheme you should consider looking into. Their main benefit is that they enable you to easily make huge contributions to your account. If you are above fifty years, you can choose to defer your first $24,000 in the form of earnings immediately into the savings account. For individuals below 50 years, they can only defer $18,000 in earnings.