Self-Employed: Beyond The Basics
Self-employed individuals have access to similar perks as W-2 employees, including health coverage, life insurance, and retirement plans. Better yet, you can leverage deductions to reduce taxable income. However, navigating the array of choices to craft a personalized benefits package can be daunting. Here's a guide to help you weigh the factors and tailor your own DIY benefits plan.
Health Insurance for Self-Employed
Many individuals overlook health insurance benefits until they face a medical emergency. This is especially true for contractors and freelancers who lack employer assistance in selecting and financing a plan. Being proactive and arranging health insurance well in advance is crucial.
In certain situations, you may have relatively straightforward options:
If you've recently departed from a full-time job, you may have the option to extend your previous employer's plan through COBRA. However, you'll likely bear higher monthly expenses as you'll be responsible for any employer contribution. COBRA extension is limited to 18 months.
If your spouse or domestic partner has health insurance through their employer, consider joining their plan. Compare the costs and coverage with buying your own insurance to see which option is best for you.
If you are unable to use these options, you can explore health insurance plans on state or federal websites. This can be done during specific enrollment periods. These periods usually happen in the fall. You can also enroll right away if you lose job-based coverage.
Before deciding on a plan, think about what health services you need and if your doctors and nearby hospitals are covered. Apps like Stride can assist you in finding more affordable health insurance. You can search and compare various public and private plans using this app. The plans can be based on your health requirements, preferred doctors, budget, and other considerations.
At minimum, opt for a plan that covers catastrophic health issues. One strategy is to combine a high-deductible health plan (HDHP) with a health savings account (HSA). HDHPs usually have low monthly premiums, but high deductibles necessitate substantial out-of-pocket expenses before coverage begins.
HSAs are designed to mitigate some of these out-of-pocket costs. Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free. Additionally, you may be able to utilize HSA funds to pay COBRA premiums.
HSAs are a good option for saving for retirement. The funds can be rolled over each year. They can also be invested. Once you turn 65, you can access the funds without penalty.
Retirement Plans for the Self-Employed
Contractors cannot use traditional 401(k) plans. However, there are retirement account options for small business owners. These options have high contribution limits. This means you can save substantial amounts in a tax-advantaged account annually.
The ability to defer taxes through retirement savings accounts ranks among the most significant tax benefits for investors. Tax deferral can potentially enhance your investment growth by keeping more of your money invested.
Consistency is key when saving for retirement. Select a plan and initiate automatic contributions.
Here's an overview of a couple of these plans.
SEP IRA
Self-employed individuals can save aggressively for retirement with a SEP IRA. Similar to a traditional IRA, contributions are tax-deductible, while withdrawals during retirement are taxed as income. What sets the SEP IRA apart is its potentially higher annual contribution limit.
- As the boss, you can contribute up to 25% of your annual salary. - The maximum limit for contributions in 2023 is $66,000. This feature empowers self-employed workers to maximize their retirement savings potential.
Solo 401k
The Solo 401(k) allows self-employed individuals to contribute as both an employee and an employer. As an employee, you can contribute up to 100% of your compensation to your taxes. The maximum amount you can contribute per year is $22,500. If you are 50 or older, the maximum amount increases to $30,000.
As the boss, you can put in up to 25% of your pay, with a maximum contribution of $66,000 in 2023. This amount increases to $73,500 for those aged 50 or older. This flexibility enables self-employed individuals to optimize their retirement savings strategy.
Life Insurance Options for the Self-Employed
When you're self-employed and supporting dependents, securing a term life insurance policy becomes paramount. Safeguarding your loved ones' financial stability is foundational to any solid financial plan.
Determining the appropriate coverage amount is the first step. You should obtain enough life insurance to replace potential lost income from now until retirement. This figure may fluctuate with your earnings trajectory, typically aiming for 10 to 12 times your annual salary.
Choosing the right policy term is equally crucial. Term life insurance provides coverage over a specified number of years with fixed premiums during the term. Upon term expiration, you have the option to renew coverage, though premiums increase significantly and may vary annually. Ensure your policy offers a guaranteed right to renew.
Considerations include:
Premiums are generally lower when purchasing at a younger age, with age and new health issues impacting premium costs.
Your premium remains constant throughout the term, providing inflation-proof coverage unlike group plans.
Periodically review your policy, especially after significant life events like having more dependents or experiencing a substantial income increase, to ensure adequate coverage.
Expanding Your Benefits Horizon
When you prioritize important things, remember to consider additional benefits that employers offer. These benefits may include disability insurance and paid time off.
Create a "paid time off bank" by setting aside money to cover sick days and vacations. Determine how much you need by looking at your average daily income and how many days you plan to take off. Save this money in a separate account to earn interest.
Disability insurance is often overlooked but is fundamental for independent workers. In the event of an income-disrupting incident, disability insurance provides crucial income supplementation. Assess the payout percentage when determining coverage needs; most policies offer 60% income replacement.
Short-term disability policies provide income replacement for shorter durations, typically ranging from 6 months to a year. Conversely, long-term disability insurance aids in prolonged illnesses or injuries, facilitating recovery over an extended period.
Embarking on this journey, prioritize safeguarding your health, loved ones, and financial future. By taking a proactive approach, you can have peace of mind to focus on your freelance work and personal life.
Bottom Line
From health insurance considerations to retirement savings strategies and beyond, taking proactive steps to protect your health, loved ones, and financial future is paramount. Remember to explore additional benefits such as disability insurance and paid time off to ensure comprehensive coverage. With careful planning and foresight, you can embark on your freelance journey with confidence and peace of mind.
Sources:
https://www.fidelity.com/learning-center/personal-finance/benefits-for-freelancers
Disclosures:
This information is an overview and should not be considered as specific guidance or recommendations for any individual or business.
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This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.
These are the views of the author, not the named Representative or Advisory Services Network, LLC, and should not be construed as investment advice. Neither the named Representative nor Advisory Services Network, LLC gives tax or legal advice. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. Please consult your Financial Advisor for further information.
Life Insurance: Several factors will affect the cost and availability of life insurance, including age, health, and the type and amount of insurance purchased. Life insurance policies have expenses, including mortality and other charges. If a policy is surrendered prematurely, the policyholder also may pay surrender charges and have income tax implications. You should consider determining whether you are insurable before implementing a strategy involving life insurance. Any guarantees associated with a policy are dependent on the ability of the issuing insurance company to continue making claim payments.