Retirement Planning For Contract Workers

Retirement Planning for Contract Workers

Contract work is an all time high. How does that change retirement planning?

Updated on Jun 17 2020

Contract workers are at an all time high in America. With the abundance of jobs like Uber, DoorDash, and other service-oriented contract jobs, combined with freelance positions for web developers, writers, and graphic designers, as well as individually-owned businesses, there are more contract jobs than ever. Contract workers are generally paid more for their skills than in a salaried position, however they usually don’t receive benefits like health insurance or a company-sponsored 401(k) plan. How should contract workers plan for retirement?

Create a budget

Your first step should be to create a budget. Record how much money you are bringing in and how much is going out, then plan accordingly. Oftentimes, contract work ebbs and flows, so you may not be bringing in a consistent amount of income throughout the year. Consider that when you make your budget and learn how to plan for the months where your income may be lower.

Retirement plan options

SIMPLE IRA - The SIMPLE IRA is an account that you can contribute money to in pretax dollars. You can contribute up to $12,500 per year and up to $15,500 if you are over 50. Because these contributions are in pretax dollars, your tax bill will most likely be lower and the limit for this type of IRA is much higher than traditional individual retirement accounts (Traditional IRAs).

Solo 401(k) - A solo 401(k) is for individuals (and their spouses) who do not employ anyone under their contract—you can’t have any employees. With this type of retirement account, you can both contribute up to $53,000 a year. Once you reach age 50, you can increase your annual contributions to up to $59,500. There are administration fees once you hit a certain amount in your accounts, so keep that in mind. Your contributions are tax-deferred up to $18,000.

Roth IRA - Roth IRAs are accounts where you can contribute up to $5,500 per year (up to $6,500 if you are over the age of 50) in after-tax dollars. Roth IRAs give the benefit of tax-free withdrawals. Roth IRAs are a good option for those making a smaller income.

You have options

There are many options for contract workers who want to save for retirement. The hardest part of it is getting started. Contract work requires discipline to set aside money for taxes in April and setting up your own retirement accounts and health insurance. If you are going the contract worker route, you may benefit from speaking with a financial advisor. They will be familiar with the ins and outs of this type of retirement planning.

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