I must say this is a very imforative article; I wanted to comment on a few things I felt were left out.
With regards to IRA’s (Traditional IRA) and Roth IRA’s, keep in mind they are two entirely two different animals. Most freelancers who earn a substantiate amount of income will never do contributions to a Traditional IRA; it will only be a destination vehicle for rollovers from other 401k’s or IRA accounts you already have. An IRA is a pre-tax vehicle that will help reduce the amount of self employment tax that you pay in the tax year you do the contribution. Assuming that tax rates are higher today and you’ll be at a lower tax rate in the future (or you’ll be pulling out less dollars which will put you in a lower bracket); pre-tax planning in the form of an IRA can help reduce your taxable income to Uncle Sam. Roth IRA’s work very differently. You’ll pay taxes today, but you’ll be able to invest that income tax free and even the interest you earn while its growing is also tax free. When you pull money out, its non-taxable (at least that’s how the tax law is written so far…) you’re probably thinking, pretty awesome huh? Well the rules are strict for allowing you to do contributions. You’ll want to make sure you qualify and don’t over contribute.
SEP IRA’s are probably the most popular vehicle for freelancers and independent contractors. Why? Because they are so easy to set-up. You’ll probably pay $100 bucks a year to open up and maintain your IRA account, then if you need advice; whatever fees are associated with an advisor you choose. What are the downsides? Well, you might be guessing as to what your contribution limit may be during the year of the contributions. Remember that 25% rule? You won’t know your 25% AGI until the END of the year (once you’ve earned everything); so you could easily over contribute during the year if your not careful. Also; you are REQUIRED to do the same employer contribution for yourself as you would for anyone else that you employ under you. This can be very tricky if you are working in a team or have staff. If you want to do a big contribution for yourself but not others; then this is probably not the right plan.
Solo 401k’s are interesting vehicle, but remember any 401k is governed by ERISA Rules. You or your advisor will be required to do proper reporting; this is more of an administrative burden and not as easy as a SEP. Usually these costs run 1500$ per year.
Finally something that was not mentioned above is an employer of record service. They usually offer a retirement plan for freelancers and contractors that you get to participate in by being part of their program. Usually it’s in the form of a 401k, but the company takes on all the administrative burdens and costs. You just get to contribute up to the limit of 49k per year or more if your 50+. There are a few really good employer of record services for freelancers out there. If you search on Google you'll find one.
Steve A of VA @ Jun 05, 2009 16:20:28 PM
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