How to Become a Master of Investing and Saving With the Individual 401k

By Josh Hoffman, Contributor, on August 25, 2017

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It sounds a little unheard-of: matching your own 401k contribution as a freelancer. Isn’t that just contributing twice as much, which you likely can’t afford?

Investing and saving are forces to be reckoned with, so long as they don’t force you to cut back to the point where you never eat out, see movies in theaters or upgrade your devices until they’ve become completely unusable. Here’s how to find a solid medium between enjoying life today and planning for the future tomorrow by investing in an Individual 401k.

Learn How to Invest Without Breaking the Bank

There are many tax-deferred investment opportunities for freelancers that can make saving less burdensome. Some of the most common include Traditional IRA, ROTH IRA, SEP IRA, SIMPLE IRA and Individual 401k. According to Jason Kassan, a partner at the Los Angeles-based accounting firm KPW, there are three main factors differentiating each type of account:

  1. Tax treatment
  2. Administrative burden
  3. Annual contribution limits

Kassan recommends a SEP IRA or Individual 401k for freelancers, since these plans allow you to contribute the most tax-deferred income with the most flexibility, and both take a relatively minimal amount of effort to set up.

Both of these options allow you to “take advantage of the powers of compounding without being taxed on the way up,” says Kassan. “When you have a regular investment account, the interest, dividends and capital gains are all taxable. With a SEP IRA or Individual 401k, you reduce taxable income now, the money in there grows tax-free and, when you withdraw from the account in the future, you’re only taxed on the amount you withdraw.”

For example, if you put $10,000 into a SEP IRA account this year, the real cost of depositing this amount is actually $7,500, since you’ll receive a $2,500 tax break to boot. In other words, you put away $10,000 for the future, and you get $2,500 worth of tax savings, so your net out-of-pocket expense is $7,500 at the day’s end for those of you in the 25 percent tax bracket.

Whether you put extra cash into a retirement account or want to start a regular investment account, robo-advisors can assist freelancers in intelligently investing in their savings. Asset allocation algorithms can invest your money in stocks and bonds that correspond with your self-selected preferences about risk tolerance and life goals.

The Saving Mindset and You

While investing is relatively systematic, saving is more of a mindset. Are you the type of person who wants to save for the future, or do you prefer to spend your money in the now?

To make savings more systematic, rather than something you need to think about all the time, Kassan recommends that freelancers transfer 20 percent of every dollar they earn from a checking to savings account by setting up auto-transfer in their online banking. For example, if you earn an average of $5,000 each month, set up an auto-transfer option that moves $1,000 into your savings account each month.

“Set it and forget it,” he says. In the end, you’ll be thankful for this small piece of automation. If you look into each avenue available to you, you’ll be well on your way to becoming a master of investing and saving—and you can relax in the meantime and benefit in the long run.

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