Question: Trevor in Deer Park: I have a support job, but I also work for an employer during the week. Can I save the money I earn from a side job at 401 (k)?
A: You really should keep these ‘buckets’ of savings separate. And it’s actually a simple way, assuming your side job consists only of you: Use “Solo 401 (k)”.
The Solo 401 (k) is basically exactly what it sounds like. It is a 401 (k) plan specifically designed for self-employed people who have no employees (the IRS calls it a single 401 (k) participant). With this type of plan, you play the role of both employer and employee, so the limits on your contribution are greater than the standard 401 (k): in 2021 you can give up to $ 58,000 or, if you are 50 or older, you can contribute up to $ 64,500.
However, there are some awkward rules about earned income and compensation when you contribute as an “employer,” so we strongly encourage you to contact a tax professional or fiduciary financial advisor if you decide to open up. Most brokerage houses and mutual fund companies offer Solo 401 (k), but the fees vary. You will also need a federal tax number (if you don’t have one, sign up for free via irs.gov).
And here’s something else that someone in your situation must keep in mind: Contribution limits for any type of 401 (k) plan are per person (not per plan). This means that if you save on your 401 (k) and Solo 401 (k) jobs, the most you can contribute as an ‘employee’ this year is $ 19,500 combined (or $ 26,000 if you’re 50 or older)). So, for example, if you’re 48 and save $ 10,000 on a 401 (k) job, in Solo 401 (k) you can only save up to $ 9,500.
Allworth’s advice is that the Solo 401 (k) is a great way for anyone with a side gig to set aside a portion of that income for retirement. If you are looking for tax-free growth, the Roth Solo 401 (k) s is also an option. Just be sure to follow the contribution rules carefully no matter which one you choose.
Q: Diane from Edgewood: Is now a good time to convert Roth?
A: First, let’s make sure we’re on the same page about the basics of Roth conversion: when you move this money, you transfer money from a traditional IRA account (not yet taxed) to a tax-free Roth IRA account, which will have a non-taxable distribution if met certain conditions and will not be subject to mandatory minimum allocations.
However, you will owe regular income tax on the amount in the year you convert, so this brings us to our first question for you: will you be able to pay this tax bill? If you don’t have the funds – or would have to withdraw the money you’re converting – that’s probably not the best time.
Second, what does your situation with the tax bracket look like? If you think you will pay higher taxes in the future, then taking advantage of historically low tax rates now makes sense. If the opposite is true, you may want to reconsider. And third, what is the situation on your property plan? Roth conversions can be especially useful if you want to transfer tax-free money to heirs.
Here’s The Allworth’s advice: Access to duty-free funds can give you much more flexibility in retirement, so the answer to your question is “yes;” generally speaking, because tax rates are at their lowest historical levels, it’s the right time to make a Roth conversion. In the end, whether you actually want to continue depends on your personal circumstances.
Every week Amy Wagner and Steve Sprovach, Allworth Financial, answer your questions. If you, a friend or someone in your family has a financial problem or problem, feel free to send these questions to firstname.lastname@example.org.
The responses are for informational purposes only, and individuals should consider whether any general recommendation in those responses is appropriate to their particular circumstances based on investment objectives, financial situation, and needs. To the extent that the reader has any questions regarding the applicability of any of the above issues to his / her individual situation, he or she is encouraged to consult with a professional advisor of his or her choice, including a tax advisor and / or attorney. Retirement planning services provided by Allworth Financial, SEC Investment Advisor. Securities offered through AW Securities, a registered broker / dealer, member of FINRA / SIPC. Call 513-469-7500 or visit allworthfinancial.com.