With the gig economy growing each year, it’s easier than ever to pick up more work apart from your main job. Whether you’re selling crafts on Etsy, driving for Uber or working for a retailer, the paychecks add up. However, without a plan, those dollars can quickly get eaten up in day-to-day living. “If you’re working a side job to bring in some extra cash, make sure you funnel some of that money into your retirement savings,” says Josh Zimmelman, owner of Westwood Tax & Consulting in New York. Follow these guidelines to put funds from a side job toward retirement.
[See: 15 In-Demand Jobs for Seniors.]
Stash funds away in a 401(k) plan. The total amount you can contribute to a 401(k) plan is $18,500 in 2018 if you are under 50 and $24,500 if you are 50 or older. If your main job offers a 401(k) plan but you haven’t been contributing the maximum amount, you can use the funds from your side job to increase what you put in the 401(k) plan. And if a 401(k) is available both through your main employer and the side job, check into ways to make the most of these saving opportunities. “Your tax-advantaged salary deferral is limited to a certain amount each year, but if you have two jobs that receive W-2s, you might be able to split the deferral amount between both jobs and have both employers match your contribution,” Zimmelman says.
Start a solo 401(k). If you aren’t contributing to a 401(k) at your main job, it might make sense to start a 401(k) for a side business that generates at least a moderate amount of income. “A solo 401(k) plan is an IRS-approved retirement plan, which is suited for business owners who do not have any employees other than themselves and perhaps their spouse,” says Adam Bergman, a tax attorney and president of the IRA Financial Group in New York. You can contribute up to $18,500 (or $24,500 if you’re 50 or older) to the plan in 2018. Also, as the owner of the business, you’re allowed to contribute up to 25 percent of net earnings from self-employment. For 2018, the combined maximum amount of these two types of contributions is $55,000 if you’re under 50, and $61,000 for those 50 and older.
Even if you contribute to a 401(k) at your primary job, a solo 401(k) for a side business may be a wise addition. “If you already have a 401(k) at work, you won’t be able to double the employee share of savings in a solo 401(k), but you can pick which fund you contribute to,” Zimmelman says. “You can limit your workplace savings to the amount that results in the highest employer match and put the rest into your solo plan.”
[See: How to Max Out Your 401(k) in 2018.]
Open a SEP IRA. For side work you pick up sporadically, such as mowing lawns or selling cakes on the weekend, it may be easiest to set aside funds in a simplified employee pension IRA. “A SEP IRA is a type of retirement plan for self-employed individuals and small business owners,” Zimmelman says. “You can have both a 401(k) and a SEP IRA at the same time, so take advantage of the tax deductions.” You can contribute up to 25 percent of net earnings to a SEP IRA, up to $55,000 in 2018. SEP IRAs are easy to start and maintain, but be aware that there are no catch-up contributions available for those over 50.
Go for an IRA. If your side gig brings in a modest income, consider putting the funds into a traditional IRA or Roth IRA. Those under age 70 1/2 with earned income can start a traditional IRA. You won’t pay taxes on your contributions or earnings until you start making withdrawals from the plan. A Roth IRA doesn’t have age restrictions, but you will need to be aware of income limitations. If you earn above a certain amount, which is $199,000 if filing jointly in 2018, you may not be able to contribute to a Roth IRA. With a Roth IRA, you’ll pay taxes on the amount you put in, but you won’t have to pay taxes on the money you withdraw. The maximum contributions for both a traditional IRA and a Roth IRA in 2018 are $5,500 if you’re under 50 and $6,500 for those 50 or older. “I really like the Roth IRA because you can pull money out without paying taxes,” says Jim Barron, a side hustler in Battle Creek, Michigan. “I set aside $500 per month, which lets me max out my Roth IRA.”
[See: 10 Tips to Boost Your IRA Balance.]
Use a robo advisor. If you want to start a diversified portfolio with the money you earn on the side, a growing number of websites can help you simplify the process. Companies like Wealthfront, Betterment and Wealthsimple offer personal finance and investing services. To streamline the process, keep funds from your side gig in a separate checking account, and then have an amount withdrawn automatically each week or month and put into your investments. “Using an automated platform to save for retirement keeps your mind free,” says Lisa Loeffler, founder of Influencers Management Group in Los Angeles, who has funds automatically withdrawn and invested.
Choose stock. If you want to invest income from a side hustle in the stock market, take some time to do plenty of research. “Invest in perpetual dividend raisers, which are stocks that raise their dividends each year,” says Marc Lichtenfeld, chief income strategist at The Oxford Club. “By investing in these kinds of companies, you’re ensuring that you get a pay raise each year, simply for breathing. You aren’t working any harder, but your investments are working harder for you. Investing in perpetual dividend raisers also helps you stay ahead of inflation and increase your buying power.”
As you purchase more stock, choose from a variety of industries and company sizes to maintain diversity. Reinvest the dividends you receive, and then let the compounding component work its magic. “Not only should your wealth increase, but the amount of income you will receive when you retire will be much higher,” Lichtenfeld says.
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How to Use a Side Job to Save for Retirement originally appeared on usnews.com
