401(K) vs IRA Edition
Saving and investing for retirement has felt so overwhelming for me that I have completely shut it down. It was helpful to realize that saving for retirement isn't a one-size-fits-all glove. There are many options for how to invest your nest egg and plenty of shared knowledge on whom to invest through, from legacy financial institutions (such as Bank of America/Chase) to brokerage firms (Vanguard/Charles Schwab/Fidelity) to retirement plan providers (Guideline/Ubiquity). But even with a financial advisor, the options seem seemingly endless.
So, how do we empower ourselves against this obscene uncertainty? We safeguard our future funds with education and the embrace of these key investment principles:
1. Compounded returns and dollar-cost averaging are your best friends for life.
2. We should have started yesterday.
3. Diversification is key.
4. Get and deep understanding of your personal risk tolerance.
Keeping those ideas at the top of mind, let's compare, in the simplest way, the two most popular retirement options for freelancers and gig workers: the Solo 401(k) and the IRA. Below is a breakdown:
Solo 401(k)
The Solo 401(k) acts just as it sounds; it’s a 401(k) just for yourself and your spouse.
Requirements: You need to have business income to qualify for the Solo 401(K) in addition to adopting a formal plan document, you’ll need to file paperwork with the IRS if you have $250,000 or more in your account.
Key Benefit:Â You are considered two people in the eyes of the IRS, which means you can double the contribution annually.
Contribution Limits: What the traditional and the Solo 401(k) do is give you the same benefits of a standard 401(k) with tax-deferred growth, tax-free growth, and tax breaks to the tune of up to $23,000 in 2024. And the best part is that because you're not just the employee but also the employer, you can contribute as much as 25% of the business income up to $69,000 for 2024.
Investment Options:Â Solo 401(k): Typically offers a wider range of investment options compared to traditional employer-sponsored 401(k) plans. Investment options may include stocks, bonds, mutual funds, ETFs, real estate, and sometimes even alternative investments
Some plans may allow participants to take out loans against their account balance.
Where to SOLO 401K:Â Nerdwallet and Investopedia both have Fidelity and Charles Schwab in their top five.
SEP IRA
SEP or Simplified Employee Pension gives you, as the employer, even up to the self-employed ability to make contributions to your employee (yourself) retirement plans.
With a SEP IRA, you can set aside up to 25 percent of your business’s income, up to $66,000 annually in 2023 (or $69,000 in 2024), and the great part is that you can do this even if you have a 401(k) through your full-time employer. Consider opening a Simplified Employee Pension (SEP) IRA if you have few or no employees and aren’t sure if you’ll be able to contribute every year.
Requirements: Contributions are made up of employee deferral contributions and employer contributions. As the employer, you would need to make mandatory contributions to employee accounts who are eligible and making contributions to the SIMPLE IRA, including yourself.
Contribution Limits: Up to $16,000 (plus an additional $3,500 catch up contribution if you’re 50 or older).
Key Differences:Â Lower contribution limits. In 2024, the contribution limit for IRAs is $7,000 (or $8,000 for individuals aged 50 and older) for both traditional and Roth IRAs.
Fewer administrative responsibilities and costs. Many IRAs have minimal or no annual fees, especially if they're held with low-cost brokerage firms.
Withdrawals from traditional IRAs before age 59½ will get you an early 10% withdrawal penalty while ROTH IRA contributions can be withdrawn penalty-free at any time.
Investment options depend on the financial institution where the IRA is held., IRAs offer a variety of investment options, including stocks, bonds, mutual funds, ETFs.
Employer matching is not allowed in the *ROTH IRA.
Where to SEP IRA:Â Investopedia has Vanguard as the highest rated SEP IRA.
These plans offer benefits to freelancers, gig workers, solopreneurs and help secure a healthy and stress-free financial future. Ultimately, your personal choice for retirement saving should be made with an informed decision-making process. And acknowledging the abundance of options, doing it now, and seeing them as opportunities rather than stress, will empower your future. give you the retirement you desire.
For a deep dive into retirement strategy, we recommend checking out the exhaustive information at Investopedia.
