Free­lancer wants to save more

Los Angeles Times - - BUSINESS BEAT - By Liz We­ston Ques­tions may be sent to Liz We­ston, 3940 Lau­rel Canyon, No. 238, Stu­dio City, CA 91604, or by us­ing the “Con­tact” form at askl­izwe­ston.com. Dis­trib­uted by No More Red Inc.

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 self­em­ploy­ment tax and my clients send me 1099s, not W2s. An­swer: You may not con­sider your­self a small-busi­ness owner, but that’s 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 setup 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 www.aicpa.org and the Na­tional Assn. of En­rolled Agents at www.naea.org. Pre­par­ing a will or liv­ing trust 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-ityour­self online le­gal sites and soft­ware such as Quicken WillMaker. If your rel­a­tives are likely to con­test your will or your sit­u­a­tion is 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. Ap­ply­ing early for 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. Why is this? 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 feeonly fi­nan­cial plan­ner who is up to date on claim­ing strate­gies is a smart idea as well.

Mark Lennihan As­so­ci­ated Press

DIS­COUNT BRO­KERS such as TD Amer­i­trade are ea­ger to help free­lancers and small-busi­ness own­ers set up and ad­min­is­ter in­di­vid­ual 401(k), SEP, SIM­PLE and other tax-ad­van­taged ac­counts.

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