Retirement Options for Online ESL Teachers and Gig Workers
So you have started teaching ESL online or doing other "gig work" and things have been going great, you don't have to change out of your pajamas or drive a long commute to work every day! But now you realize there ARE some drawbacks to the job, especially if this is your sole income. One of those drawbacks is a lack of saving for retirement that you may have in place when you are employed in a typical job. In today's blog post I am going to give you a general overview of retirement saving options you may want to look into when contemplating setting up a retirement plan and system for yourself.
*Keep in mind I am NOT an accountant, just a fellow gig worker who realized after 5 years I needed to do SOMETHING real quick or I would be sleeping on my kids couch in 20 years. Trust me neither of us wants that! As always you should consult your financial planner or accountant on the best retirement options for you and your situation. Hopefully by reading this article you wont look like a deer in headlights when you go to speak with them :)
The first question you need to ask is- Am I saving enough for retirement? There are several online retirement saving calculators you can use to get a rough idea of the numbers you need for retirement savings. Retirement saving at 30 is going to look very different than retirement saving at 50! As you get closer to retirement age it will be important to talk to a financial adviser to get a better and more accurate picture of your needs, but for now this will give you a good start on your planning. I will warn you that this number often looks insurmountable! Do not panic and give up before you have even begun. Any retirement savings is better than none.
Below are a few retirement saving calculators I have used:
1. Typical Taxable Account- Now one of the simplest ways to get started is to just open up your run of the mill savings account or mutual fund and start stocking away some money for later. Although any savings is beneficial, this plan has some definite draw backs to meeting your long term goals of retirement. To start with, it is much easier and much more tempting to touch that money when things pop up in your daily life. You are also paying taxes up front on that money rather than the deferred tax breaks many of the traditional retirement plans offer.
2. Traditional or Roth IRA- An IRA is probably one of the easiest ways to get started saving for retirement. However there is a limit to the amount that can be contributed each year. For 2019 you can contribute up to $6,000 (plus an additional $1,000 if over 50). You will want to research the differences between the traditional and ROTH IRA to see which fits your situation better. A ROTH IRA has income limits so if you make too much you will not be able to choose that option. You will receive a tax deduction on your contributions to a traditional IRA. A ROTH IRA does not have a tax deduction but the withdrawals in retirement are tax free, this is ideal for those that will likely have a higher tax rate at retirement age. An IRA can be opened at an online brokerage in a few minutes. Here are some IRA providers you may want to look into.
3. Solo 401(k)- This retirement option is great for people who are looking to save a bunch of money in the next few years. You can contribute up to $56,000 in 2019 (plus $6,000 if over 50) OR 100% of earned income, whichever is less. In this scenario you are basically contributing as both the employer and the employee. It works just like a typical employer offered 401(k) where you make the contributions pre-tax and you pay tax on distributions after age 59 1/2. The contribution limits are per person NOT per plan, so if you have another job where you receive a 401(k) these limits will cover both plans. You can open a Solo 401(k) at most online brokers but you will need to file paperwork with the IRS each year that you have more than $250,000 in your account. There is also the possibility of choosing a solo Roth 401(k) which is similar to the ROTH IRA in that you will pay taxes up front and then the distributions will be tax free.
4. SEP IRA- This is a good option for self employed people because it is easier to maintain than a solo 401(k), there is minimal administration and paperwork and you don't have to report yearly to the IRS. However it still has high contribution limits like the solo 401(k) and is flexible- you wont have to contribute every year. If you have employees, you have to make contributions equal to the % of pay you contribute for yourself. So it may not be the best option for those gig workers who are employing a few people, but for most of us this won't come into play. You can contribute $56,000 (in 2019) or up to 25% of net self employment earnings ($280,000 cap for earnings), whichever is less. You can deduct these contributions on your tax return. When you receive distributions after retirement they will be taxed as income.
5. Simple IRA- This option is best for larger businesses (up to 100 employees), so likely will not apply to those of us doing independent contractor work. But we will quickly review it as well, just in case you jump back into regular employment or start employing a lot of people. Feel free to give me a call and offer me a job when that happens :) This is an easy retirement plan to set up and the accounts are owned by the individual employees. Employees can contribute up to $13,000 (in 2019), if you contribute to an employer plan as well your total cannot exceed $19,000 (for the 2019 tax year). The contributions are deductible but will be taxed in retirement. Any contributions you make as an employer to the employee's plan will be a deductible business expense. This is different than the SEP IRA because employees can contribute themselves through salary deferral, but the employer is usually required to make matching contributions up to 3%of pay or fixed contributions of 2% to every employee. This can be expensive as an employer with a large number of employees participating. It is not a very flexible plan for the employee as they are penalized for early withdrawals or roll over to another retirement account within the first two years.
6. Defined Benefit Plan- This plan is great for those self-employed people who have no employees and a high income, especially if they are looking to save a significant amount in a short time or ongoing basis. This is similar to a pension plan that you make for yourself. Your contribution limit is based on the benefit you will receive at retirement, your age, and what you expect in investment returns. The contributions are tax deductible and your distributions at retirement will be taxed as income. The downside is they are expensive to set up and they carry heavy administrative fees and burdens each year. You need to be committed to funding the plan with a certain amount each year. There are fewer brokers available to set up these types of plans, but you can put a lot of cash into these! If you are close to retirement age and want to save a significant amount this may be a good choice for you.
So where can you open a retirement account? You can open a typical tax savings account at any bank. There are tons of online and in person broker options out there for the four most common account types we talked about. Personally I have my accounts at Vanguard and have found them easy to work with, but a quick online search will give you many options. For a defined Benefit Plan your options will be more limited, but brokers like Charles Schwab can set you up with this plan.
Your broker can walk you through the process of opening any of these accounts and help explain all of the paperwork and tax documents, but an accountant may be a good option if you want a thorough explanation and more help deciding which choice is best for you!
If you are interested in learning more about saving for retirement, I highly recommend the following books:
I hope this article was helpful! Have you begun saving for retirement? Which plans have you chosen? Please let me know in the comments how you are saving for retirement or any tips you may have for those just starting their retirement journey!