Bayla Arietta


RETIREMENT FOR ARTISTS 
Rembrandt, Vermeer, and Van Gogh all died in poverty but with a little financial planning, you don’t have to.

Most of us don’t know anything about retirement. It’s rarely taught in school and when we do hear about retirement options, it always seems to target married couples with 9 to 5s and 401ks. If you are a self employed-artist, an employer provided 401k or 403b is probably not an option for you, but that doesn't mean you can’t still plan ahead for your retirement.

You can always keep money in a bank savings account, but according to the FDIC, the national average interest rate on savings accounts currently stands at 0.05% APY, meaning your money will barely keep up with inflation. Opening a retirement account is a great option for artists or any small business owners to plan ahead for their future.

Types of Retirement Accounts

As an individually employed artist without the benefit of an employer’s retirement plan, your options are a Roth IRA, a Traditional IRA, a SEP IRA, a Solo 401k, and a HSA. Some of these are additionally available to you even if you also have a 401k or 403B.

Let's look at what each one of these options are so you can choose what is best for you:

Roth IRA
An Individual Retirement Account is a personal account not tied to an employer. A Roth IRA isn’t itself an investment, but an account through which you can buy investments. Most Roth IRAs will give you access to a large investment selection, including individual stocks, bonds and mutual funds. The investments you select should be based on your risk tolerance and age.

A Roth IRA is good because you are paying taxes on what you put in. It grows but you don’t pay taxes on what you pull out. If you are in a low tax bracket now and think you will be making more money later in life, the Roth IRA is a great option because you pay low taxes on your contributions now, but won't have to pay taxes on your earnings when you take the money out years down the line.

Find what 2021 tax bracket you are in here:

A Roth IRA is the best deal for young investors and will have significant tax advantages over time. There are many great places to open a Roth IRA such as Fidelity, M1 Finance, Vanguard or Betterment since they have a lot of high-quality low-cost investment options (I personally chose Fidelity for the customer service, which I needed when I was first learning). It’s not necessary, but you might want to choose the same place you would also open a brokerage account for investing. Apps like Personal Capital however, are great for managing your money even if you have accounts in many different places.

Another benefit of a Roth IRA is that you can pull out your contributions (the money you put in NOT your earnings) at any time, tax and penalty free. This will negatively affect your earnings in the long run, so it is not recommended, but good to know for emergencies! Once you reach age 59.5, you can withdraw the earnings tax and penalty free as well. The account must also be at least 5 years old by this time. As of 2021, Roth IRA max is $6,000 ($7,000 if you're age 50 or older), so this is what you should try to contribute every year.

Roth IRAs historically deliver between 7% and 10% in average annual returns. So, if you contribute $6000 a year starting at age 25, you might end up with around $1,146,940.00 by age 60, when the earnings can be collected tax and penalty free. That means retiring with approximately $38,231 a year if you live until 90 years old.

Calculate this for yourself here!

There are a few noteworthy exceptions that come with Roth IRAs that might be helpful to know. If you’re younger than 59½ and have owned a Roth IRA for less than five years, you can still withdraw some of your earnings for special circumstances. They are as follows:
You’re withdrawing up to $10,000 to buy your first home.
You’re withdrawing up to $5,000 in the year after the birth or adoption of your child.
The withdrawal is for qualified education expenses.
The withdrawal is for unreimbursed medical expenses in excess of 7.5% of your adjusted gross income for the year.
The withdrawal is for health insurance premiums while you’re unemployed.
The withdrawal is due to disability.
The withdrawal is made to a beneficiary or your estate after your death.
You decide to take substantially equal payments, which basically locks you into taking at least one distribution per year for at least five years or until you turn 59½, whichever comes last.
The withdrawal is due to an IRS levy.
You made the withdrawal when you were a reservist, as defined by the IRS.

Generally you’ll owe income taxes and a 10% penalty if you withdraw earnings from your account, but if you withdraw because of one of the above exceptions, you can avoid the penalty, but not the income taxes.

If you’re younger than 59½ and you have owned a Roth IRA for 5 year or more, you can avoid taxes and penalties on earnings you withdraw from your account if you meet one of the following exceptions:
You’re withdrawing up to $10,000 to buy your first home.
The withdrawal is due to disability.
The withdrawal is made to a beneficiary or your estate after your death.

Traditional IRA
Traditional IRAs are taxed when the money is withdrawn, unlike Roth IRAs where the money is taxed going in. It is also good to know that contributions to a traditional IRA are tax-deductible if you are not covered by another retirement plan. A Traditional IRA might be a good choice if you believe you will be in a lower tax bracket (making less money) than you are now when it is time to retire. You can begin taking withdrawals from your Traditional IRA beginning at age 59 ½, with the distribution subject to ordinary income tax.

Whether you participate in a traditional IRA or a Roth IRA, you can contribute up to $6,000 per year, or $7,000 if you’re 50 or older to one or both combined - never exceeding the max per year. They are counted together so you cannot fill both with $6000 a year but you could put $3000 in each if you wanted too.

Roth vs Traditional IRA
The biggest difference between a Roth IRA and a traditional IRA is how and when you get a tax break. Contributions to traditional IRAs are tax-deductible, but withdrawals in retirement are taxable. Contributions to Roth IRAs are not tax-deductible, but the withdrawals in retirement are tax-free. Do you think your tax rate will be higher or lower in the future? If you can answer that question definitively, you can theoretically choose the type of IRA that will give you the biggest tax savings: If you expect to be in a higher tax bracket in retirement, you might want to choose a Roth IRA and its delayed tax benefit. If you expect lower rates in retirement, a traditional IRA and its upfront tax advantage may be better.

If you think a Roth or Traditional IRA is right for you, one option is putting investments into a target date retirement fund. These are offered just about anywhere you choose to open an account. The target date fund naturally adjusts your investment allocation between stocks and bonds as you get closer to retirement, so you don’t have to do much except keep putting money in! Another option is to invest your IRA in a mixture of low cost index funds which have lower fees over the long term, but a target date fund is a good place to start if you are new to investing or simply don’t want to think too hard about it.

SEP IRA
SEP-IRAs are primarily used by small-business owners who want to help their employees with retirement, but freelancers and the self-employed can also use this option. When you are a registered business owner and have more than the $6,000 limit to contribute, a Simplified Employee Pension IRA (SEP IRA) is a traditional IRA for self-employed people & small-business owners. It’s a retirement account that offers tax breaks for business owners and self-employed individuals who put money away for the future. If you have self-employment income, a SEP IRA will allow you to save more for retirement than either a traditional IRA or a Roth. With a SEP IRA, you can contribute up to $58,000 in 2021, however the annual contribution limits cannot exceed the lesser of 25% of compensation. You can combine a SEP IRA with a Traditional or Roth IRA.

Generally, SEP IRAs are best for self-employed people or small-business owners with few or no employees because the IRS requires you to contribute an equal percentage of compensation to both your own retirement and that of your employees.

Contributions are tax-deductible, meaning they reduce your taxable income, and  investments grow tax-deferred until retirement, when distributions are taxed as income.

Keep in mind, you must be a sole proprietor, business owner in a partnership, limited liability company, S corporation or C corporation, or earn self-employment income in order to qualify.

Solo 401k (or one-participant 401k)
A solo 401(k) is an individual 401(k) designed for a business owner with no employees. You can’t contribute to a solo 401(k) if you have full-time employees, though you can use the plan to cover both you and your spouse. There are no age or income restrictions and you can contribute up to $58,000 in 2021, with an additional $6,500 catch-up contribution if 50 or older.

In this type of retirement, you must think about yourself as both an employee and an employee. Within the overall contribution limit, your contributions are subject to additional limits in each role:
  • As the employee, you can contribute up to $19,500 in 2021, or 100% of compensation, whichever is less. Those 50 or older get to contribute an additional $6,500 here.
  • As the employer, you can make an additional profit-sharing contribution of up to 25% of your compensation or net self-employment income, which is your net profit less half your self-employment tax and the plan contributions you made for yourself. The limit on compensation that can be used to factor your contribution is $285,000 in 2020 and $290,000 in 2021.

Keep in mind that if you also have a 401(k) at another job, the limit applies to contributions across all plans, not each individual plan.

With a solo 401(k), you have the option to pick your tax advantage: You can opt for the traditional 401(k), under which contributions reduce your income in the year they are made. In that case, distributions in retirement will be taxed as ordinary income. The alternative is the Roth solo 401(k), which offers no initial tax break but allows you to take distributions in retirement tax-free.

Sep IRA vs Solo 401k
SEP IRAs and solo 401(k)s both allow small business owners to establish retirement accounts for their employees, but SEP IRAs are funded by employer contributions alone. Solo 401(k)s allow both employer and employee contributions. As a qualified plan, 401(k)s come with rigorous reporting requirements while SEPs are relatively simple.

Solo 401(k) plans offer employee deferrals, catch up contributions for participants who are age 50 and above, and post-tax Roth contributions while SEP IRAs only allow traditional pretax contributions. Lastly, Solo 401(k) plans allow participants to take out a loan equal to the lesser of 50% of the plan balance or $50,000. Loans are not available with SEP plans.

HSA
HSAs are intended to pay for healthcare expenses, but they can be a valuable source of income once you retire. To qualify for an HSA, you need a health insurance plan with a deductible of at least $1,400. For families, it's $2,800.

HSA Contribution Limits for tax year 2021
  • $3,600 for individuals
  • $7,200 for family coverage
  • $1,000 extra "catch-up" contribution if you're age 55 or older

In retirement, you can withdraw HSA money for things other than healthcare without incurring a tax penalty. Once you turn age 65, you can use HSA funds for any reason. You just pay ordinary income tax on the distributions.


Resources for you
Millennial Money
ChooseFI
Mr. Money Mustache
Free Tools tab at Dave Ramsey


Copyright © 2021, Bayla Arietta
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