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Ask Farnoosh: Saving for Retirement When You Work for Yourself

@Kirsten_AD and @thinkyoungmedia tweet: I'm self-employed & am super interested in learning about the best retirement options 4 the self-employed.
 
Hey Kirsten and Courtney,
 
Without the convenience of an employer-sponsored 401(k) or 403(b), planning for retirement can be a challenge. A survey by the Freelancers Union survey found that 27% of freelancers have not saved anything for retirement.
 
Speaking from my own experience, it’s not impossible to save, however. There are a number of options to consider, as long as you’re willing to put in the extra effort. “As your own boss, you have to pull that money out of your paychecks, set up the investment accounts, and monitor them,” says Sara Horowitz, founder and executive director of the Freelancers Union and author of The Freelancer’s Bible. “The good news is, you have access to the same investments employers do, and depending on your income, you might be able to save more in your tax-deferred accounts than the W-2 crowd can in their retirement plan,” she says.
 
The first type of retirement account worth considering is the Individual Retirement Account or IRA. “If you’re planning on putting away less than $5,000, the IRA is the easiest option,” says Howard Samuels, a New Jersey-based certified public accountant at KDMS LLC. “You can walk into a bank and set it up with little hassle.” Contributions to an IRA can be deducted from your income.
 
If you want to set aside more than $5,000, consider a SEP IRA, short for Simplified Employee Pension Individual Retirement Arrangement. You can open one at any major brokerage such as Fidelity or Charles Schwab. The maximum contribution per year is 25% of your net income, up to $51,000 in 2013. Like an IRA, the contributions are tax-deductible. You can also crunch the numbers using IRS Publication 560 to see what your allowable contribution is.     
 
Want to defer even more? Still another option is the Solo 401(k). This is more in line with a company 401(k), where, as a participant, you can defer up to $17,500 in 2013. Additionally, you can invest up to 25% of your net income or no more than $51,000. Again, IRS Publication 560 has some handy worksheets to help you figure out the exact allowable amount. Similar to the other investment accounts mentioned, you can reduce your taxable income with your contributions. But Horowitz warns, “Although it can allow you to save a large amount, there’s some complexity and expense involved in managing [a Solo 401(k)].” You may want to work with an accountant or financial consultant for advice in this case.
 
Vernon emails: Are there new programs under this administration that will allow full or partial forgiveness of the remainder of a student loan if you have been paying it for 10 years or more? I’m nearing 17 years and the balance is still over $13,000.
 
I know those student loan payments can seem never-ending. There is a light at the end of the tunnel for certain borrowers who’ve been paying consistently each month for several long years. According to student loan expert Heather Jarvis, "federal student loans can be forgiven after 20 or 25 years of payments under an income-driven repayment plan.” The Income-Based Repayment plan became available in the summer of 2009 and serves to assist borrowers with major financial challenges, low income compared to debt or considering public service work. The plan pegs your monthly payments to no more than 10% of gross income. At IBRinfo.org you can determine your eligibility. All federal student loan borrowers are eligible with the exception of those in default, Parent PLUS and Parent PLUS consolidation loan borrowers. Loans taken out after July 22, 2014, on the IBR plan will be forgiven after 20 years instead of 25 years, as part of President Obama’s plan to assist student loan borrowers.
 
If you’ve been working full-time in public service for a qualifying employer and have been paying off your federal loans for 10 consistent years, you may be eligible for even faster forgiveness. Public Service Loan Forgiveness recognizes a number of public service jobs, like law enforcement, military, social work in a child or family service agency, public librarians, faculty teaching in high-need subject areas, etc.
 
Got a question for Farnoosh? You can reach her on Twitter @Farnoosh or email her at farnooshfinfit@yahoo.com.

 

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