With gig economy work, it can be hard to set money aside for retirement
Making money in the gig economy, or the shared economy, comes with a lot of benefits – whether it’s freedom, flexibility, or the bonus of some side hustle money. However, it also means you need to be more on top of your finances than someone who works in a traditional setting. Here’s what you need to know about retirement planning in the gig economy.
Who is in the gig economy?
There are more people than you think
36% of people working in the United States are part of the gig economy, a category that’s probably broader than you think. This includes independent contractors, contract workers, and freelancers, as well as people you are more likely to associate with the gig economy – like those in temporary or on-call work, or people who work online.
Self-employment is on the rise alongside gigging
In addition to this high gig economy participation rate, self-employment is on the rise. By 2020, 42 million people will be self-employed, almost 3 times as many people as were reported in 2014. Plus, whether it’s their full-time gig or something they do on the side, 56.7 million people in the United States are freelancing.
Because the gig economy is growing, it’s important for accountants to better understand this trending area. It’s important for you, as a part of this workforce, to understand your finances, tax obligations, and plans for your future.
Why are people joining the gig economy?
People are working in the gig economy to pay off debts short-term
One of the reasons it’s important to think about financial planning if you are a part of the gig economy is tied to the reason you may have started working in it in the first place. 68% of people are using gig work to pay off debts. This can help in the short-term, but what about long-term planning?
But they’re not planning for the long-term
Three out of 10 people who make most of their money gigging are not setting aside money for retirement regularly, which can really hurt down the line. The worst part may be that full-time giggers know that they are not prepared for retirement, with 7 out of 10 reporting that they don’t feel like they’ll be able to keep up with their current lifestyle when they retire.
What three things can gig workers do to improve their future now?
So, if you joined the gig economy to get out of debt, but you’re not planning for the future with the money you make, what are the three most important changes you could make to improve your financial planning, starting right now? First: decide how you want to save for your retirement. Second: Set aside money for emergencies. Third: Make sure you’re documenting everything. We’ll cover the first step in this blog.
What retirement plan should you invest in as a gig economy worker?
Roth or Traditional IRA? Individual 401(k)? Or something different? It’s hard to navigate retirement options as a gig economy worker, but taking the time to figure out what works best for you can lead to financial benefits.
To get you started, here is a simple comparison of all plans you could choose from as a gig economy worker, not including any restrictions you may face in particular:
|Type of Retirement Plan||Contribution Amount||Other Notes|
|Traditional or Roth IRA||Up to $6,000 (or $7,000 if you are 50 or older) in contributions in 2019|
|SEP-IRA||Up to 20% of net profit on Schedule C, subtract self-employment tax
2019 maximum contribution is $56,000
|Employers can contribute up to 25% of their employee’s total compensation up to $56,000|
|SIMPLE IRA||Up to $13,000 in salary deferral contributions (or $16,000 if you are 50 or older) in 2019||Employers can match contribution at 3% of compensation
To contribute for current tax year, you need to open by Oct 1.
|Individual 401(k)||Up to $56,000 in contributions, with additional $6,000 in catch-up if you are 50 or older
Employers can contribute up to 25% of their employee’s total compensation up to $56,000
|Could be a good choice if you don’t have any other employees except for a spouse|
Traditional or Roth IRA
If you’re working in the gig economy as a side hustle, and you have a 401(k) plan through your employer, contributing additionally to an individual retirement account (IRA) could be a good supplemental move. You can choose to contribute pre-tax dollars (traditional IRA) or have your withdrawals not be taxed in retirement (Roth IRA).
If you already have a 401(k) through work, it functions the same as a traditional IRA, so it makes more sense from a contribution and tax standpoint to diversify with a Roth IRA. Make sure you’re getting the best match possible from your employer before you decide to contribute to other accounts. If you’re self-employed, other retirement plans can lead to better benefits.
With an SEP-IRA (Simplified Employee Pension Individual Retirement Account), you can save more for yourself than you could with a traditional or Roth IRA. You are qualified to open this type of account if you are self-employed or have very few employees as a small business owner.
The benefit to retirement plans like this, SIMPLE IRAs, and individual 401(k) plans is that you will be both the employer and employee. The maximum contribution for 2019 in SEP-IRAs is up to 20% of the net profit reported on your Schedule C, minus self-employment tax, not to exceed $56,000. However, there is no catch-up provision like there is on other plans.
A SIMPLE IRA is similar to an SEP-IRA. If you are solo, or have fewer than 100 employees, you can have a SIMPLE (Savings Incentive Match Plan for Employees) IRA. One of the benefits of this plan is the paperwork is minimal.
You can make up to $13,000 in salary deferral contributions, with $3,000 additional catch-up contributions for those ages 50 or older, in 2019. There are some rules for employers for either mandatory contributions or matching compensation, and stricter rules on deadlines (if you want to contribute for the following year, for example, you would have to open the account by October 1 in the current year).
If you meet the requirements, a Solo 401(k) could be your best option. It’s available for people who are self-employed. It’s also available for those who have a business with no other full-time employees outside of ownership and spouses. Gig workers fall under this category quite easily most of the time.
Maximize your contributions with a Solo 401(k)
Maximum contributions are high for this plan. In 2019, the maximum contribution is $56,000, with $62,000 in catch-up for people who are 50 or older. Compare that with the SIMPLE IRA – with a $13,000 maximum in 2019 and a $3,000 catch-up, or the SEP IRA – no employee deferral and no catch-up provision. There is also a tax-free Roth option with the Solo 401(k). If you are looking to take out a loan, you can take one on your plan up to 50% of the value of your account (capped at $50,000).