Q&A: Retirement savings for freelancers

Dear Liz: I am a freelancer. I don’t consider myself a small-business owner, just someone who gets the work done on time and gets paid. I max out my IRA every year, but would like to save more in a tax-advantaged account.

I checked out SEP and SIMPLE IRAs, but they don’t have a Roth option. Am I eligible to start an Individual 401(k)? What administrative duties would be involved? I pay self-employment tax and my clients send me 1099s, not W2s.

Answer: You may not consider yourself a small-business owner, but that’s essentially what you are. And small-business owners should have tax pros to help them answer questions like this, since you have so many options.

As a sole proprietor, you should be able to set up a solo or individual 401(k) account. That would allow you to make either pre- or after-tax “employee” contributions of up to $18,000 in 2015 — plus an additional $6,000 if you’re 50 or older.

As your own employer, you can contribute an additional 25% of your net earnings (a contribution that would be deductible as a business expense). Your total contribution, employee plus employer, can’t exceed $53,000 in 2015.

Individual 401(k)s are somewhat more complicated to set up and administer than Simplified Employee Pensions (SEPs) or Savings Incentive Match Plan for Employees (SIMPLEs). But many discount brokerages are eager to help you with the paperwork and have low or no set-up costs.

You have many other ways as a self-employed person to reduce your taxes, but the rules can be complicated. A certified public accountant or an enrolled agent can help advise you of your options. You can get referrals to tax professionals from the American Assn. of CPAs at http://www.aicpa.org and the National Assn. of Enrolled Agents at http://www.naea.org.

Q&A: Creating a will

Dear Liz: I’m a 58-year-old man. I want to make a will just in case something happens to me. I have about $500,000 in stock and cash. I have a life partner and her son. I would like to split my assets between her and my sister. Any suggestions on how to go about this?

Answer: Just in case you turn out not to be immortal, having a will is a very good idea. Otherwise, your assets would be distributed according to state law, which means your lady friend probably would get nothing.

You also may want to consider probate, the court process that typically follows death. While probate is fairly simple in most states, in others — including California — it can be expensive and slow, making a living trust a worthwhile option.

You can prepare a will or living trust using do-it-yourself online legal sites and software such as Quicken WillMaker. If your relatives are likely to contest your will or your situation is otherwise complicated, you should consult with an estate planning attorney for help.

You could provide additional protections and advantages to your partner by getting married. As your wife, she could receive spousal and survivor benefits from Social Security based on your work record. You both would have visitation rights if the other were hospitalized and be empowered to make financial and health decisions if the other were incapacitated.

Marriage can have many other legal, financial and tax benefits as well. If you opt to remain unmarried, please talk to an attorney about available ways you can protect each other’s rights.

Q&A: Social Security

Dear Liz: My husband decided we should take Social Security before age 65. I worked intermittently until 67. I do not get half of his Social Security as do many women who never worked. Can you explain why?

Answer: The reason is probably because your own benefit is greater than what you would get as a spouse.

When you apply for Social Security early and have a qualifying work record of your own, you are “deemed” to be applying for both your benefit and any spousal benefit to which you might be entitled. You’re essentially given the larger of the two.

Both potential benefits are reduced by the fact that you applied early, and you lost the option of receiving just a spousal benefit for a few years before switching to your own benefit.

This “claim now, claim more later” strategy could have substantially boosted your checks and the lifetime amounts you received from Social Security.

The decision to apply early can be a costly one and shouldn’t be made without fully understanding the consequences.

A recently published book, “Get What’s Yours: The Secrets to Maxing Out Your Social Security,” does a good job of explaining the options. Consulting a fee-only financial planner who is up to date on claiming strategies is a smart idea as well.

Monday’s need-to-know money news

Zemanta Related Posts ThumbnailToday’s top story: Tax credits that can save you a lot of cash. Also in the news: How to make your kids smarter about money, why we overspend with our credit cards, and how to get through the most awkward money conversations.

5 Tax Credits That Can Save You a Boatload of Cash
Don’t miss out.

9 ways to make your kids smarter about money
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How credit cards get us to overspend
Mind games.

The 9 most awkward money conversations and how to get through them
The conversations you can’t avoid.

Friday’s need-to-know money news

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5 Things New Grads Wish Their Parents Had Taught Them About Money
It’s not too late!

6 personal finance hacks to maximize your savings
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5 Things To Know Before Starting A Small Business
Research is key.

The Hidden Costs of Free Trials
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Thursday’s need-to-know money news

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3 Smart Habits That Can Help Build Your Credit
Habits you should pick up.

Protect Your Data From Cyber Crooks
Tips on keeping your data safe.

The 7 Most Important Steps of Financial Planning
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Who Can See My Credit Score or Credit Report?
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Most Americans Can’t Pass This Basic Social Security Quiz
Can you?

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Boosting your score over the summer.

5 Ways to Get Credit Bureaus to Remove Errors From Your Report
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Top 5 Money Moves to Make After Graduation
Don’t let your student loan debt overwhelm you.

Credit Card vs. Personal Loan: Which One Should I Get?
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Catch The Company Stock Tax Break While You Can
The window is closing on a little known tax break.

Q&A: Breaking even with Social Security

Dear Liz: This is in regard to the reader who created a spreadsheet that he thought showed the advantage of taking Social Security early. I retired at age 62 and am now 69 and have not yet started drawing my benefits. I have never done a spreadsheet to determine the relative advantage in waiting to draw on my personal benefits; I’ve simply assumed there is no advantage or disadvantage, actuarially. That is, whether I took benefits beginning at age 62 or waited, as I’m doing, the total amount I would receive would be the same if I lived an average life expectancy. Given the fact that my wife would be drawing my benefit if I die first, however, it’s clear that my waiting to age 70 to draw my benefits works to our joint advantage. Am I right?

Answer: In the past, the Social Security Administration advised people that they would receive roughly the same amount by starting reduced benefits early as they would by waiting to receive larger amounts, assuming they lived an average life expectancy.

These days, though, longer life expectancies at age 65 mean that most people will live past the “break even” point where waiting for enhanced benefits results in more money over a lifetime than starting early. The break-even point is in one’s late 70s. Men have a 60% chance of living to age 80 and women have a 71% chance, according to the Society of Actuaries.

When you’re married, you need to think in terms of two life expectancies, because the chances are even better that one of you will live past the break-even point — perhaps well beyond.

With married couples, there’s an 88% chance at least one of you will live to 80, a 72% chance of at least one spouse living to 85 and a 45% chance one will live to 90.

Because a surviving spouse will have to get by on just one Social Security check — either her own or one equal to what her spouse was getting — maximizing at least one benefit makes a lot of sense.

There’s also the idea that Social Security should be used as a kind of longevity insurance. The longer you live, the more likely you are to use up all your other assets, so a bigger check can mean a much better standard of living.

Q&A: Lost tax payment

Dear Liz: I just received a letter from the IRS informing me that I missed a quarterly tax payment last September with several resulting penalties. I made that payment with a check from a securities trust account that I don’t closely monitor, so I didn’t realize the check hadn’t been cashed. The check was placed in a pre-addressed envelope with the IRS payment notice, stamped and deposited at the post office and has never been seen since. Do I have any recourse, and should all payments to the IRS be sent by certified mail with receipt required?

Answer: Electronic payments are typically the best and safest method for getting money to the IRS. Electronic payments generate a digital trail that shows the money leaving your account and landing at the IRS.

If you insist on paying with checks, use certified mail, return receipt requested. This paper trail isn’t a sure way of proving your case — after all, you could have mailed an empty envelope — but at least you’d have something to show the IRS.

Still, you shouldn’t give up hope of getting the penalties waived, said tax pro Eva Rosenberg, an enrolled agent who publishes the Tax Mama site. You can request a penalty abatement based on “reasonable cause,” Rosenberg said. According to the IRS site, “Reasonable cause relief is generally granted when the taxpayer exercised ordinary business care and prudence in determining his or her tax obligations but nevertheless failed to comply with those obligations.”

The IRS may say that you didn’t exercise “ordinary business care and prudence” since you didn’t use certified mail. But you can make the counter-argument that you’ve consistently made previous estimated tax payments this way without incident and this is the first time you’ve encountered a problem.

Rosenberg said the key to prevailing is to keep trying. The IRS may reject your first and second attempts to get a penalty waived but acquiesce on the third, she said.

“Don’t give up after the first two rejections,” Rosenberg said.

One more thing: Given the high rates of identity theft and database breaches, closely monitor all your financial accounts. That means checking them at least monthly, if not weekly. If you have more accounts than you can adequately monitor, consider consolidating accounts.

Friday’s need-to-know money news

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A Guide to Your Mid-Year Financial Checkup
How’s your year going so far?

6 Credit Card Vows Every Newlywed Couple Should Make
Saying “I Do” to a budget.

Study: Credit scores impact auto insurance
A low score could mean higher premiums.

5 Weird Ways Credit Card Debt Can Hurt You
Where you’d least expect it.