401k Advice for 22 year old Freelance Artist

**atomicrc11** · 08-26-2009, 05:42 AM

If you're setting things up on your own, I would go with a Roth IRA. You pay taxes on the money you earn now and then get to take them out tax free.

If you don't have a lump sum of money, say $3000, I would look at Fidelity, Schwab or T. Rowe Price to setup your Roth IRA.

Fidelity lets you open a SmartStart IRA in which they require no opening balance, but you contrubute $200/month until you meet the minimum requirement of $2000 for the Fidelity Freedom Fund you choose.

T. Rowe Price has a similar setup, but their investment is $50/month.

Schwab lowered the minimums on their funds and you can open a Roth IRA in one of their target date funds for as little as $100 with additional investments in increments as small as $1.

All three are good companies. I am with Fidelity as my company retirement plan is there along with my Roth and my checking account. They have great customer service and a good amount of physical branches. That makes it easy to deposit checks right into the Fidelity accounts I have. But you really can't go wrong with any of those companies.

As for a Traditional IRA, I would avoid that as you are close to not being able to deduct the contributions which makes the Roth IRA a better choice.

**sk24iam** · 08-26-2009, 06:59 AM

I'm 23 and I'm contributing to a 401k but only because my company matches up to a certain percentage. I wouldn't reccomend going with a 401k until you have that opportunity. I agree with the above post and would invest into a Roth IRA. There are so many benefits that would apply to you. Try to max out your ROTH every year(5,000).

**illinigamer** · 08-26-2009, 07:10 AM

I would agree that a Roth IRA is the way to go. Also, I would recommend reading on the difference between a traditional and Roth IRA (there are a bazillion articles if you google it).

In a nutshell, traditional IRA can be deducted from your income (assuming you are below a certain income level, which in your case is a BAD assumption) and you pay taxes on it when you make withdrawals in retirement. A Roth IRA on the other hand cannot be deducted, but you do not pay taxes on the withdrawals. This results in the choice between paying taxes now (Roth) or later (Traditional).

**amedvedovski** · 08-26-2009, 03:22 PM

Another alternative is to incorporate yourself. This way you can save more money pre- and post-tax even though some costs involve in incorporating , in the end of the day you might pay less taxes overall. But before doing this please get advice from CPA. It is worth it!
Alex
alexfacts.blogspot.com
Twitter: @alexfacts

**zetta** · 08-27-2009, 01:36 AM

I haven't looked into the individual 401k so I don't have any advice there.

ROTH IRA and traditional IRA are limited to something like $5k contributions per year. When your freelance business grows to the point that you are able to put more than that toward retirement, you should open a SEP-IRA. You are allowed to contribute up to 20% of your business income toward the SEP-IRA, and it gives you a good tax deduction as well.

Aim to put 15% of your income toward retirement, with the first $5k going to the ROTH, and the rest going to a SEP-IRA.

Save an additional 5% of income for big purchases like a downpayment on your first home and your next car.

**zetta** · 08-27-2009, 01:43 AM

I looked up individual 401k. Looks like the main benefits are a higher contribution limit and the ability to borrow from it. There is also a ROTH 401k that is interesting...

What makes the Individual 401k unique is that compared to other self employed retirement plans greater contributions may be made at identical income levels, therefore maximizing retirement contributions and valuable tax deductions. 2009 Individual 401k contribution limits are $49,000 a year ($54,500 if age 50+). Also, an Individual 401k allows the flexibility to borrow against the value of your 401k. Tax free loans (up to 50% of the total 401k value with a $50,000 maximum) are permitted in an Individual 401k plan.
Self employed business owners may be well suited for an Individual 401k if their objective is to maximize their retirement contributions or if they would like to borrow from their retirement plan using their 401k balance as collateral via a tax free Individual 401k loan.
Learn more about the benefits of the Individual 401k.

**sk24iam** · 08-27-2009, 08:44 AM

I think you can only do a roth 401k if your company offers it.

**zetta** · 08-27-2009, 10:39 AM

You can do an individual 401k or individual ROTH 401k if you are self-employed (ie freelance) like the OP. SEP-IRA is also for the self-employed, and is probably simpler to set up.

Here's where I found information about the plans:
Individual 401k | Individual401k.com

**vayne001** · 08-29-2009, 07:28 PM

Thank you everybody for the great advice! I have been researching a little also and have decided to start with a Roth IRA and am looking at the company Vanguard. The plan they offered looked good. This was the one I was looking at:

https://personal.vanguard.com/us/funds/snapshot?FundId=0699&FundIntExt=INT

It seems like there is also a lot of positive feedback from people using them, and I do have the minimum 3,000 they require.

I know that minimum got mentioned, was there another company that also has the same minimum with good results i should look into as well?

Thanks again!

**investingnoob** · 08-30-2009, 02:20 PM

^ Perfect choice, I too went with the Vanguard target 2050 and couldn't be happier.
You would be crazy not to have a roth ira, I wish I wouldve started at 18, but 21 is still a good start.

**TBH** · 09-07-2009, 06:16 AM

It sounds like you're handling your money well, but I just wanted to ask--I assume you're spending a similar amount every month, so that the higher-paying months help sustain you during the lower-paying months? That's the hardest thing about having an irregular income. You've got to make sure you don't spend as much as you earn all the time so that you will have enough money to make it through when work is slow.

Here's how I handle my freelance income. Whenever money comes in, I put it in a special savings account at ING Direct called my "holding tank" account. Once a month, I sweep the money out of that account and divide it up as follows:
20% to my short-term savings account (used for emergencies, and also big semi-regular bills like insurance premiums or major house or car repairs)
10% to my retirement account (I use a SEP-IRA) (yes I know this is too low)
35% to my tax savings account, out of which I pay quarterly estimated taxes
35% to my living expenses account

Every month I take the same amount out of my living expenses account. During the lean months, I take out more than I put in. During the boom times, the extra money builds up the account a little.

Right now I have enough in my living expenses account to float for nearly 4 months if all my work dried up. I am hoping to increase the buffer to 6 months' worth by the spring.

I'm still trying to get the hang of paying my own taxes. After this year I'll reassess--I think I might be saving too much for taxes. I'll put the extra in my retirement account, and then adjust the percentages I'm putting aside. Probably I'll put 15% toward retirement and 30% toward taxes.

401k Advice for 22 year old Freelance Artist