contribution « OMG I'm Thirty

So hopefully by now you’ve opened up your Roth Ira or Traditional IRA. Even if you’re not self-employed and have a 401k plan at work, it’s still a great idea to open up a Roth, and it’s never too late. Here’s how to open a Roth IRA right now.

If you already have a Roth IRA and/or a traditional IRA, you probably know that the maximum contribution you can make to both (total) per year, as of 2015, is $5,500. Then you have to wait till next year to contribute another $5,500. If you’re 50 or older (and if you are, you’re awesome and I appreciate that you’re still reading our blog about the 30s), you can contribute an additional $1000, totaling up to $6,500.

Because I’m still paying off my ridiculous NYU student loan, $5,500 a year is about the most I can contribute to my Roth IRA anyway right now. But that won’t be always be the case. So what happens when I want to contribute more than the $5,500 a year Roth IRA cap, but I’m self employed so I can’t open up a 401k at my workplace?

There’s a solution. There are actually multiple solutions.

A self-employed writer friend of mine recently told me that she’d hit the limit for the year on her Roth IRA and was currently holding on to extra money in her bank account while making less than 1% interest (most bank accounts and savings accounts are 1% interest or less). “Roth IRA’s have such a low cap,” she said to me, “$5,500 compared to $18,000 in a workplace 401K. Are we completely at a disadvantage since we’re self-employed? What should I do?”

Holding onto your extra retirement money in your savings account is not a good solution, because your money won’t earn enough interest for retirement. You should, of course, have an emergency savings account, but that account is different from your retirement fund. So without further ado, here are some great choices for retirement accounts if you’re self employed. And these are IN ADDITION to your Roth IRA (which I hope you’ve opened!)

My favorite option: The Roth Solo 401K (also called the Roth Individual 401k)

Why it’s great: You can contribute up to $18,000 in 2015! That’s fantastic, and is the same contribution limit as the one on a 401k you’d get working at a “real job”.. (most day jobs). Also, there are Solo 401Ks and Roth Solo 401ks, but I love the Roth, because all the money compounds and gathers interest in your account for years and years, and when you receive it after retirement, EVERY PENNY will be tax free. AMAZING!

Drawbacks: If you have employees, you can’t open one of these. Only you and your spouse can participate. Also, if you’re self-employed AND working a day job, you’ll be able to contribute only $18,000 to your workplace 401k and your Solo 401k TOTAL (so probably not the best option for day-jobbers with workplace 401ks).

How to open a SOLO 401k: You have until December 31st. Try opening one at Vanguard, which is my favorite place to open Roth IRAs because of the low to no fees involved.

Another Good Self-Employed Reirement Fund Option: The SEP IRA (Simplified Employee Pension Individual Retirement Account)

Why it’s good: You can contribute as much as 25 percent of your earnings to this IRA, up to $53,000 for 2015. That’s a lot of money! Also, this IRA is very simple to set up. You can probably set one up online in 15 minutes or so.

Drawbacks: You’re not able to make the SEP IRA into a Roth SEP IRA. This is a major drawback, as you’re able to take tax deductions now (every dollar you contribute to your SEP IRA you can write off your taxes now, which is nice), but when you withdraw money in retirement, every penny will be taxed, including all your investment earnings. This is helpful right now for a tax write-off, but not good in your retirement years. Also, this plan may be costly if you have employees, as you’ll have to contribute for them as well.

How to open a SEP IRA: Again, I usually recommend Vanguard, but do your research. T Rowe Price and Fidelity also looked like good options.

Great Option if you have employees: SIMPLE IRA (Savings Incentive Match Plan For Employees)

Why it’s great if you have employees: The SIMPLE IRA was basically designed for self employed business owners with employees. If you have a few employees, maybe 3-10, and they make more than $5000 a year, but way less than 100K, this is a good one for you. It’s also easy to set up and should take you 15 or so minutes online.

Drawbacks: If you have more than 100 employees, the SIMPLE IRA might not be the right plan for you- this was designed for smaller businesses. Also, if you have a day job with a 401k, you’ll be able to contribute only $18,000 to your workplace 401k and your SIMPLE IRA TOTAL (so probably not the best option for day-jobbers with workplace 401ks). The deadline was October 1 to open one for 2015, but you can still open one for 2016.

How to open a SIMPLE IRA: Here’s Vanguard again, and you can also try Scottrade, Fidelity, and T Rowe Price.

Hope this was helpful! Enjoy your awesome self-employed life while you build just as big a nest egg as your friends with day jobs!

The glamorous world of working from home a lot when you’re self-employed (hint: not so glamorous).

It’s still tax time! If you finished your taxes already, kudos to you!

For everyone else, lets get some more questions answered..(and for the record, I haven’t finished mine either, so don’t worry). 🙂

Also, if you didn’t get to read Part 1 of Tax Questions Answered, click here.

I do my parents’ taxes every year and just finished their 2014 filing this weekend. However, I recently realized that even though they always take the standard deduction, I still spend time calculating their itemized charitable contributions- even though that particular type of contribution (charitable) doesn’t factor in on your taxes if you take the standard deduction.

If the paragraph above made no sense to you, let me clarify below. We’ll start with some terminology I feel like I should know all of this now that I’m thirty, but some of it I actually had to dig into a bit, so I’ll explain it pretty piecemeal here:

Gross Income= What you make in a year, including EVERYTHING, from Jan 1 to Dec 31 (you, of course, probably already know this one).

Adjusted Gross Income= Your taxable income after you subtract certain ADJUSTMENTS but before you subtract either the Standard Deduction or your Itemized Deductions (you can only subtract one or the other of those two types of deductions)).

Standard Deduction= An amount you can always subtract from the gross income you’ll be taxed on, as long as you don’t subtract your itemized deductions instead. The standard deduction for the 2014 tax year is:

Single or married filing separately: $6,300
Married filing jointly: $12,600
Head of household: $9,250

Itemized Deduction (not the standard deduction kind)= These are deductions you can take if you decide NOT to take the standard deduction. These include but aren’t limited to: medical and dental expenses that exceed 7.5% of your AGI (Adjusted Gross Income), property taxes, your state and local income or sales taxes, charitable donations you make, work related travel, union dues.

So if you’re trying to decide whether to take the standard deduction or itemize your deductions, you want to basically choose whichever one is larger.

Here’s an example: Let’s say you’re unmarried with no children and make $50,000…And you can itemize these deductions:

$1000 in work related unreimbursed travel
$500 in medical expenses
$400 in state and local taxes
$100 in clothes donated to goodwill

This equals $2000 in Itemized donations. If you chose to itemize deductions, you’ll be taxed on $48,000 (50,000-$2000). If you took the standard deduction, you’ll be taxed on $43,700 ($50,000-$6,300). So you’d want to take the standard deduction for sure, because you want to be taxed on less income and pay less money 🙂

I’ll stop here for now, but hope this was somewhat helpful! Next time, I’ll talk about Adjustments and Credits, and how they can reduce your tax bill even further!

As always, please let me know if you have any questions or anything to add. Thanks!

OMG I'm Thirty

Everything You Should Know About Your Thirties

Tag Archives: contribution

What Are My Retirement Account Options If I’m Self-Employed in My Thirties

My favorite option: The Roth Solo 401K (also called the Roth Individual 401k)

Another Good Self-Employed Reirement Fund Option: The SEP IRA (Simplified Employee Pension Individual Retirement Account)

Great Option if you have employees: SIMPLE IRA (Savings Incentive Match Plan For Employees)

Standard Deduction vs Itemized Deductions, The Most Common Tax Questions in Your Thirties- Part 2

My favorite option: The Roth Solo 401K (also called the Roth Individual 401k)

Another Good Self-Employed Reirement Fund Option: The SEP IRA (Simplified Employee Pension Individual Retirement Account)

Great Option if you have employees: SIMPLE IRA (Savings Incentive Match Plan For Employees)

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