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Why Creators Should Plan for Retirement
Just because you’re an independent creator doesn’t mean you can’t save for retirement.
Every creator knows that this career path is unconventional and unpredictable. That’s why it’s important to start saving for that day when you can no longer – or no longer want to – work.
There are a number of retirement accounts that are great for independent creators and self-employed individuals, depending on your specific goals and needs.
Here’s a breakdown of each one to help creators determine which one is best for you.
SEP IRA - For the Creator That Wants No Fuss
The SEP (Simplified Employee Pension) IRA is one of the easiest to set up. If you’re an individual creator with few or no employees, this is a great retirement plan option.
Unlike a traditional IRA, a SEP IRA lets you contribute significantly more money, up to $69,000 for 2024. Creators can also deduct their total annual contributions from their total taxable income, which, obviously, means you’ll pay less in taxes. However, that means any distributions you take in the future will be taxed (and who knows what those tax rates will be).
Another key feature of the SEP IRA is its flexibility: you don’t have to contribute to it every year, which is the same for solo 401(k)s. Creators know well that income is far from guaranteed, and some years, you need more padding than others. So, in those leaner years, you can opt out of making retirement plan contributions, and put that money to work elsewhere.
Generally, you don’t want to employ too many people because, if you choose a SEP IRA, the IRS requires you to contribute on behalf of all eligible employees – and those contributions have to be an equal percentage to your own. So, if you put away 25% of your income into a SEP IRA, you’re required to contribute 25% of your employees’ compensation to their plans.
For creators that just want a simple and easy retirement plan with little to no overhead costs (plus a pretty nice tax deduction), then the SEP IRA is for you.
Solo 401(k) - For the Creator That Prioritizes Saving
A solo 401(k) is ideal for creators with no full-time employees because, if you want to have a solo 401(k), the IRS says you can’t actually have any employees.
However, you can contribute to a solo 401(k) as both an employer and an employee, but your total contribution limit is capped at $69,000 for 2024. With a solo 401(k), you can also make a “catch up” contribution of $7,500 if you’re 50 and over, which means you can ultimately save more for retirement. And, like SEP IRAs, you don’t have to contribute to it every year.
There are two different kinds of solo 401(k)s: traditional and Roth. The main difference between a Roth solo 401(k) and a traditional 401(k) is when you’re taxed. So, a creator’s goals and current circumstances will determine which one is more ideal.
A traditional solo 401(k) is pre-tax, meaning you can reduce your total taxable income but will have to pay taxes on distributions, i.e. the amount you withdraw from your retirement plan. If you take distributions before the age of 59 ½, then you might have to pay penalties if you don’t meet one of the IRS exceptions.
A Roth solo 401(k) doesn’t give you that same initial tax break, but the benefit is that, when you do take distributions from it, you won’t be taxed. That being said, you need to have held your account for more than 5 years and are at least 59 ½ years old, or taking distributions due to disability or death.
For creators who want to reduce their current taxes and save more for retirement, the traditional solo 401(k) is for you. For creators who simply want to have an easy retirement without worrying about tax rates, then go for the Roth solo.
Defined Benefit Plan - For the Creator That Wants to Retire in Style
If you’re a high-earning creator who wants to save a lot of money for retirement – fast – then you should consider defined benefit plans.
Also known as pension plans, defined benefit plans have much higher annual contribution limits: for 2024, you can contribute a maximum of $275,000.
Unlike other retirement accounts where the payout depends on your investment returns, defined benefit plans calculate your retirement benefits ahead of time so you can receive a steady, fixed monthly income or a lump sum payout.
The downside of these plans is that they’re expensive to set up. You need to pay for set up fees, filing fees, and annual actuarial valuations (they can also take up to 3 months to set up). If you have employees, you’ll also be required to offer them the same plan, which will increase costs.
Creators should keep in mind that you need to commit to a minimum funding level in order to meet your desired retirement payouts – generally, recommended at $50,000-$80,000 per year. So, for creators whose income is more volatile, a defined benefit plan might not be the best retirement option.
Simple IRA - For the Creator with Employees Who Wants Minimal Hassle
If you’re a creator with under 100 employees who wants to offer them a chance to save for retirement with minimal hassle, then consider the SIMPLE IRA. They are relatively inexpensive and easy to set up and maintain.
Unlike the SEP IRA, employees can also contribute to their SIMPLE IRA retirement plans, so creators don’t have to shoulder the entire burden themselves. That being said, employers will be required to match it.
Creators can also receive a maximum $500 tax credit per year, for the first 3 years of the plan, as long as they have employees who have been paid at least $5,000 the previous year, and at least one other employee who is not “highly compensated.”
The main downside of the SIMPLE IRA is that the contribution limit is much lower than other retirement plans. Employees can contribute a max of $16,000 for 2024, tax-deferred, or $23,000 if they’re contributing to an employer plan. If saving for retirement is your primary concern as a creator or you have a large number of employees, this might not be the best plan for you.
