Saving for retirement while working in the gig economy can help secure your future while also reducing your income taxes. There are several options for retirement contributions. While some contributions do not result in a tax deduction, investment earnings accumulate in retirement plans on a tax-deferred basis. This means you can invest in a retirement plan, earn income, and not need to pay any tax on the earnings generated on your retirement savings.
Let’s look at four plans that allow you to save for retirement when you are self-employed and working in the gig economy.
Traditional or Roth IRA
IRAs are the simplest type of retirement plan possible, and allow you to can contribute up to $7,000 ($8,000 if you are 50 or older) in 2024.
With a traditional IRA, you can generally deduct the amount of your contribution as long as you have sufficient earned income to cover the contribution amount and are within specific income thresholds.
A Roth IRA works like a traditional IRA except that contributions are not tax-deductible. The benefit is that your disbursements after age 59 ½ are tax-free. Any earnings on your Roth IRA are only tax free if you maintain the funds within the Roth IRA for at least 5 years and reach age 59 ½. While Roth IRAs do not provide a tax deduction, they are still a great way to save for retirement and generate tax-deferred income. Like the traditional IRA, the Roth IRA also has income limits. The key difference is that if you exceed those limits, a Roth IRA contribution will not be permitted at all.
Lastly, if you have a side gig in combination with a full-time job, you might not be able to deduct your IRA contribution if you exceed the allowed limits.
SIMPLE IRA
The SIMPLE IRA has two advantages over a regular IRA:
- Contribution limits are much higher, at $16,000 ($19,500 50 or older) in 2024.
- You can open a plan for your gig venture and make tax-deductible contributions, even if you are covered by a plan at your primary job.
Just like a regular IRA, it can be set up as a self-directed plan where you pick where you want to invest. You can also contribute up to 100% of your side gig income to the plan, but only up to the allowed contribution limit of $23,000 in 2024.
Solo 401(k)
A Solo 401(k) plan works just like an employer 401(k) plan, except it’s for one self-employed person, or in this situation, your side gig activity. The Solo 401(k) has very generous contribution limits, at $23,000 ($30,500 50 or older) in 2024.
These contribution limits represent the “employee” portion. However, with a Solo 401(k) plan for a self-employed person, you act as both employee and employer. This means you can contribute 100% of your income to the plan as an employee up to the employee contribution limit, but you can also contribute up to 25% of your income as an employer contribution.
As an additional benefit, you can have a solo 401(k) plan in place even if you have a retirement plan through your primary job. However, the contributions to both plans cannot exceed $69,000 in 2024. The overall limit includes both employee and employer contributions.
Simplified Employee Pension (SEP) IRA
The SEP IRA is last on this list because it offers a very high contribution (and tax deduction) if you are a high-income earning individual. The limit is calculated as a percentage of your earnings. This means that if your side gig is just getting off the ground, the nominal limit may be much lower than the others on this list.
The maximum contribution you can make to a SEP IRA is 25% of your net business income up to $69,000 for 2024.
You can have a SEP IRA in combination with a plan from your primary employer. But once again, your total contributions to the two plans can’t exceed the contribution limits for a single plan ($69,000).
Choose One Plan and Open an Account
Obviously, most people who work in the gig economy are looking to earn additional income. But you can also use this income to increase your retirement savings, while potentially getting a tax deduction.
If working in the gig economy is a full-time occupation, you need to take a closer look at opening one of these plans to ensure you have money set aside for retirement. One more reason to open a retirement plan is to get a tax credit. Some taxpayersare able to reap the benefit of the Saver’s Credit worth up to $1,000 single ($2,000 married filing jointly) just for investing in your retirement. This credit is completely phased out once your AGI exceeds $38,250 for single filers, $57,375 for head of household filers, and $76,500 for married filing jointly filers.
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