We’re drawing close to the end of the year and I know a lot of you are starting to plan for next year—and have a lot of questions! Trust me, I feel you. I’m also trying to plan what I can for next year in terms of career and finances…and it’s no joke. The level of uncertainty out there right now is real. Here’s a virtual hug for everyone out there struggling. ❤️
I know no one wants to think about retirement, especially not during the holiday season, but this is the best month to get yourself prepped for tax season next year and for 2021! And my ace in the pocket is the SEP IRA.
What’s a SEP IRA and why do you need one?
Well, let’s step back a second. I know I’m jumping out of order in my “basics” but retirement is just that important. This is money that once you put away, no one can take away from you. It’s money that will keep working for you, doing its own little thing while you’re living life and trying to learn how to knit for the fourth time during lockdown. Or eating way too many cookies trying to revise your book (not me at all, of course).
There are a lot of different ways to save up for retirement, but today I’m going to talk about IRAs.
IRAs are Individual Retirement Accounts and they are vehicles for individual retirement savings, aka retirement that’s not attached to a company like a 401k.
There are 3 different types you need to know about:
Roth IRA: I love Roth IRAs. The money you contribute is taxed at your current income tax rate, which is beneficial if you’re younger/earlier in your career (creative or not) OR you believe that when you’re 65, you will be in a higher income tax rate. Paying the tax on your contribution earlier means you’re saving money in the long run. However, there is an income limit for contributing. You can ocontribute to a Roth IRA if you make less than a certain income ($139,000 is the limit for 2020 and $140,000 is the limit for 2021). The contribution limit for 2020 is $6,000.
Traditional IRA: These are the standard IRAs most people know. You can contribute to a Traditional IRA at any income and you won’t pay taxes on your money until you withdraw (typically at 65 or later). Traditional IRAs do offer tax benefits, so don’t forget to include them in your calculations when you start your taxes! The contribution limit for 2020 is $6,000.
SEP IRA: The golden child. Really, I love SEP IRAs for creatives. For starters, you can have a Roth or Traditional IRA AND a SEP IRA if you’re self-employed. SEP IRAs are tied to your self employed income and you can contribute 25% of your compensation for the year or up to $57,500 for 2020—whichever is the lesser number for that tax year.
Ok, so why are SEP IRAs amazing?
First of all, the contribution limit is not a static number, it’s based off of YOUR income for the year. You can sock away a HUGE amount of money for your retirement at one time, which is great when you don’t know when your next advance or royalties check is coming. (This is of course, if you’ve already got your emergency fund! More on that in a future post.) You also can not contribute another year, if it’s leaner.
Like I said before, whatever money you contribute/save will keep growing and working for you. SEP IRAs also help reduce your tax burden and as a self-employed creative, your tax burden is usually high. Self-employed professionals always get double punched during tax season (but that’s a whole other topic).
You can contribute money directly to your retirement and save money on your taxes with a SEP IRA. And you can still have a Roth or Traditional IRA. It’s really a win-win.
And you can open one on your own. No need for a financial advisor or for your accountant—it’s in your hands. I personally use Fidelity, but there are a number of great brokerages you can use to open any type of IRA.
So go forth and save!
I want to hear from you! If you have any questions, comment down below or submit them here: https://bit.ly/savvyquestions
Disclaimer: I’m not a registered or licensed financial advisor, these are just my thoughts on personal finance and subsequently, the views reflected are subject to change at any time without notice. The opinions expressed are only for informational and educational purposes.