By Jenny Rough
After reading the last page, I closed The Golden Willow and held it to my chest. I love Harry Bernstein’s writing. Other than a novel that never received much attention, Bernstein didn’t publish his next book, The Invisible Wall, until he was 96. The Dream followed at 97 and Willow at 98. Now, he’s 99 and working on another book.
I turned 36 this summer, and when I blew out my candles, I wished to still be writing 63 years from now. I have no intention of ‘checking out’ of my career when I hit retirement age.
Even so, I opened a Solo 401(k) for my freelance writing business. “A lot of self-employed people think they’ll never retire, but you need a safety net in case a health issue arises or something happens and you can no longer do what you love,” said Jeremy Vohwinkle, a Michigan-based retirement counselor who blogs for About.com and GenXFinance.com.
Recently, I talked with Vohwinkle and other financial advisors about retirement options for freelance writers. Here’s a roundup:
BASIC PLANS
• Traditional IRA: A Traditional IRA is open to any freelance writer who has earned income. In 2009, you can contribute up to $5000 ($6000 if age 50 or older). The money squirreled away is not taxed upfront, but will be taxed in retirement. Meaning, you can deduct your IRA contribution from your income taxes, but the contribution, plus any growth, will be taxed when you pull the money out.
• Roth IRA: A Roth IRA is similar to a Traditional IRA (same contribution amounts) except the tax break comes later. Meaning, you’ll pay tax on the amount you contribute, but when you pull the money out in retirement, you won’t pay taxes, not even on growth. You can only contribute to a Roth IRA if your income falls within a certain range. If filing as a single, your eligibility begins phasing-out when your modified adjusted gross income hits $105,000 ($166,000 if married, filing jointly).
SPECIALTY PLANS
• SEP-IRA: Next to a basic IRA, a SEP-IRA it’s the easiest option to set up. The benefit of a SEP-IRA is that you can contribute more money than you can with the basic plans. In 2009, as a sole proprietor, you can contribute up to 20% of your net adjusted business earnings, or $49,000 (whichever is less). Unlike other plans, there is no catch-up contribution if you’re age 50 or older.
• SIMPLE-IRA: In 2009, you can contribute $11,500 ($14,000 if age 50 or older). Your company can match up to 3% of your income (as a sole proprietor you’re considered both an employee and employer – enabling you to make your own contributions as well as matching ones).
• Solo 401(k): “The Solo 401(k) is the grand-poobah of retirement plans for small business owners because although it has the same cap as a SEP-IRA, you can contribute more at a lower income level,” said Jim Joseph of Financial Services Advisory in Rockville, Maryland. Only available to small business owners with no employees (unless the employee is your spouse), in 2009, sole proprietors can contribute $16,500 plus 20% of net adjusted business earnings, or up to $49,000 (whichever is less). If you’re age 50 or over, the maximum contribution is $54,500. A Solo 401(k) can be slightly more complicated because you might have to file an annual form with the IRS.
Many factors such as marital status, steadiness of income, or how your business is structured may trigger different rules. Also, if you have employees, you may have to fund their plan depending on which option you choose, so keep that in mind if you intend to hire help. Visit a local Fidelity or Schwab office to find a financial advisor who can assist you with picking the best plan for your circumstances.
More sage advice? Mike Van Horn, a small business advisor in California, has three final tips for freelance writers:
1. Don’t quit your day job
2. Move back in with Mom and Dad
3. Put away 5%-10% off the top of every check you receive
Jenny Rough is a lawyer-turned-writer and have written articles and essays for The Washington Post, Los Angeles Times, Self, Yoga Journal, and Writer’s Digest, among other publications. She blogs about books for LIME.com and her work has appeared as commentaries on public radio.
Flickr photo by peasap
{ 2 trackbacks }
{ 11 comments… read them below or add one }
5-10% is not enough. Instead, tighten your belt and put away 15% of everything into retirement. I personally favor a ROTH IRA over either a 401k or Trad ROTH.
Yep. I like ROTH’s and SEPs. And salt away 20% if you can afford to.
Great solid practical advice here. Thanks. Peace, Linda
Thank you for reminding me to go put money in my Sep-Ira…it’s been a little while :)
Wait…writers make money? Enough to put away for retirement?
;o)
Great article, I will have to look into the New Zealand version at some point in the near future.
Thanks for this recap as I was just thinking about SEP stuff the other day. I didn’t realize there were a few more options out there for me so I appreciate the input.
And yes, I agree on the 15% – 20% contribution if you can manage it.
In my experience, the amount you put away depends on whether writing is your main source of income or not. If you’ve got a “day job,” an employed spouse, or a small trust fund, then you can afford to put away more. One writer I work with, who is also an attorney, socks away ALL her writing royalties and fees.
But if you pay rent and groceries out of writing fees, squeezing out even a few percent may seem impossible. So I exhort these folks to begin taking just 5% off the top. Invest so that you get COLA + 5%, and watch the magic of compounding.
Whatever percentage you put in, it also becomes your fund for partial self-insurance for healthcare, getting through recessions, etc.
mvh
good article, but If you are planning your retirement and you’re confused, you’re not alone! There is no doubting the fact that many Americans have trouble distinguishing between the various flavors of retirement plans.
I’m one of the writers who has a day job so I try to put away most of my royalties into my retirement plan. I need to up my percentage again.
Some would say that being a writer–if you get halfway decent fees and royalties–IS a retirement plan. Many professionals I work with gradually do more writing about their profession as they get older. When they get to the age where they want to cut back or retire, the writing is still there, and it continues to provide both revenue and engagement.
Like Jenny Rough said, she wants to be writing till she’s 99.
Hell, some of us may not be able to afford to retire till then anyway!
mvh
It is a great idea. And you contribute to the retirement plan funds that you would be sending to the IRS instead.
I recently upgraded from a SEP to a Solo 401k Plan with the Solo 401k Retirement Group as my income is variable each year.The Solo 401k allows me to shield my iincome from taxes starting at the first dollar earned and if I need to I can borrow up to 50% of my account paying the interest to myself.
off course, in addition you’d should consider an investment annuities, because is an insurance annuity for you and your children.