More than 40 percent of the U.S. workforce is composed of people in non-traditional jobs: They are freelancers, business owners and independent contractors, often cobbling together a paycheck from several sources.
If you're self-employed, a Roth IRA is probably one of the essential retirement saving tools you need in your arsenal. It's hard enough for traditionally employed people to save for retirement, and harder still for the self-employed.
In a nutshell, Roth IRAs are particularly good for people who expect to be paying a fairly high tax rate when they are retired. That includes a lot of self-employed people, like small business owners who might cash out of their companies later in life.
Traditional plans for retirement savings allow people to deduct contributions from their taxes but require them to pay taxes on withdrawals. Roth plans require you to contribute after-tax money, but enable you to deduct withdrawals you make in retirement.
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One side note: If you are considering a Roth IRA, you probably want to also look at a SEP IRA or one of several other kinds of retirement plans specifically designed for self-employed people. You can save a big chunk of your money (as much as 25 percent of your income, up to $53,000) for a tax break in the present day.
This year, you can contribute $5,500 to Roth after you've made your SEP contribution. However, you also have to fall under the income limit for Roths. If you are married, you must make less than $183,000.
The ability to contribute to both a SEP and a Roth is a boon to the self-employed that makes it a little bit easier to save. The rules are detailed on this IRS website.
Here Are Four Things to Know if You Want to Open a Roth IRA
1. You need a brokerage company to hold the account for you.
Look for one with good customer service and no fees on the account. Any one of the big brokerage houses, from Fidelity to Vanguard to Schwab, offers Roth IRAs, as do smaller brokerages. Look for a brokerage that offers to hold the account for you without charging a fee. You might also find it convenient to keep your Roth IRA at the same company that offers a SEP or other kinds of IRAs.
Because you're self-employed, look for a brokerage house that employs advisors, like Merrill Lynch, or a discount brokerage like E*Trade that offers good phone support and advice on picking investments. You can also hire an independent investment advisor or financial planner.
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2. When it comes to investing for retirement, keep it simple and cheap.
One of the easiest options is a high-quality Target Date Fund, which will automatically match your investment mix to your age as the years go by. You can also ask your brokerage to buy a selection of mutual funds or ETFs. The classic approach is a mixture of stock and bond funds, with the proportion of bond funds rising as you age.
Keep in mind that one of the factors you can best control is fees. Look for low fees on whatever investment you pick. You should be able to find low-fee, broad-based funds for your Roth IRA for an expense ratio of less than .25 percent a year. Remember, any gains are growing tax-free, that's one of the best things about a Roth IRA.
3. You're better off making automatic, periodic contributions.
Because you're self-employed, you don't have the crutch of automated deductions and escalations, which people who work for traditional employers do. Set up monthly contributions: automatic deductions from your bank account to your Roth IRA. Investment research shows that small, regular contributions over time can help your returns.
4. It's important to look at all of your retirement accounts at once to make sure that you are diversified.
If you're self-employed, and don't have a financial advisor, the only person doing this is going to be you. So make sure you've diversified into stock and bond funds, and perhaps international stock and bond funds, too.
Why is it crucial to look at all your plans at once? If you're 90 percent in stock mutual funds in your SEP plan, which has $100,000, and 90 percent in bond funds in your Roth, which is only $25,000, you aren't properly diversified between stocks and bonds. Look at your total and then decided how you want to invest.
You can read more about Roth IRAs here. The rise in self-employment is one of the factors behind the decline in workplace retirement coverage:
About 30 percent of U.S. workers are not in jobs where employers offer retirement savings plans. Changes in the workplace are placing the burden on you to save for retirement, but the tax code gives you the tools you need to succeed. Start now.