Gig workers are in bad shape financially. They aren’t saving enough for retirement, and the majority expect to still be working well past age 65.
Yet this growing segment of the economy, which has more than doubled in five years and now accounts for about 40% of the U.S. workforce, continues to be largely overlooked by the U.S. retirement savings system.
Motivated gig workers have some options to partially fill the gap like individual retirement accounts. But most U.S. retirement-savings policies center on 401(k)s and other employer-sponsored savings accounts. That leaves independent workers—including freelancers, contractors and folks working for web-based platforms like Uber and
DoorDash
—to plan for themselves.
Even the Secure Act 2.0, passed in late 2022 as one of the most comprehensive laws to improve retirement savings rates, included little to help elevate retirement security for independent gig workers.
The biggest change for these folks is that the government will match 50% or up to $1,000 of gig workers’ IRA contributions. But the saver’s match doesn’t go into effect until 2027, and it will only be available to singles tax-filers earning less than $35,500 and couples filing jointly who earn less than $71,000.
Meanwhile, gig workers’ savings shortfall will have a profound impact on folks as they enter retirement age, says Geoff Sanzenbacher, a research fellow at the Boston College Center for Retirement Research.
The longer a worker spends in the gig economy the worse off they will be. For folks who leave a salaried job for contractual work after age 50, their retirement income will be up to 27% lower than folks who were on a payroll, he says. Those who spend most of their careers working solo will be even worse off.
The root of the problem is the lack of an employer-based retirement savings option for gig workers, says Roger Young, an advisor at
T. Rowe Price.
“They don’t have the benefit of an HR department helping to nudge them into a plan or automatically enrolling them in a plan.”
There are glimmers of hope for change. Some private companies are trying to supply retirement products and savings incentives to appeal to gig workers.
In January, the trading platform
Robinhood
began offering a 1% match to IRA contributions and rollovers if they are held in the account for at least five years.
In late 2020, Icon Financial Services launched a so-called payroll-deduct IRA that allows companies that employ gig and hourly workers to deduct IRA contributions from their workers’ earnings and invest them automatically, as companies now do routinely for workers with 401(k)s. Icon works with some employers in healthcare, construction, consumer services and restaurants.
In May, a trio of bipartisan senators—Kevin Kramer (R ND), Mark Warner (D-VA) and Todd Young (R-IN)—reintroduced legislation to launch a pilot program to provide gig workers with portable retirement and health insurance accounts that mimic benefits offered by employers.
Sanzenbacher of the Center for Retirement Research notes that such proposals have occasionally cropped up over the years but are complex to implement and have fizzled. “I wrote my dissertation in 2010 on the Obama administration’s proposed auto IRA plan,” he says.
Several states are trying to pick up the slack. Oregon, California, Illinois and Colorado have launched automatic retirement savings programs available to all employees working in the state, including gig workers.
There are, of course, various non employer-linked retirement savings options available to gig workers. If workers max them out they could save as much on a tax-favored basis at salaried employees. I will talk in detail in a later article about how employees can set up their own 401(k)s or personal pensions. But the first and easier step—even for lower-paid workers—is funding an IRA.
“People say about 1099 [gig] workers, ‘Can’t you just start an IRA?’ With that line of thinking then why even offer a 401(k) plan?” says Icon CEO Laurie Rowley. “It’s because it’s hard to become your own pension manager.”
But under current rules, that’s exactly what gig worker must do, says Nayan Ranchhod, a private wealth advisor at Ameriprise Financial Services in Scottsdale.
As you consider how much you can sock away, remember to set aside what you’ll need to pay taxes, including the 15.3% self-employment tax, which includes both Social Security and Medicaid taxes, he says.
Salaried workers split the 15.3% tax, known as the payroll or FICA tax, with their employers. “Most independent workers forget they have to pay both sides of FICA,” Ranchhod says.
Which accounts to use depends on your income and how much you expect to be saving.
If you fall under income eligibility thresholds, consider starting with a Roth IRA.
Most retirement savings vehicles allow pretax money to grow tax deferred and then trigger income tax on withdrawals. With a Roth, contributions are made with after-tax dollars, but you won’t owe any taxes on withdrawals. Generally, anyone eligible should opt for a Roth over a traditional IRA—the Roth’s tax-free status gives it a big edge over the regular IRA’s tax deferral for anyone trying to cut their tax bill in retirement.
For all types of IRAs, you can contribute a maximum $6,500 if you are single or $7,500 if you are married filing a jointly—plus $1,000 if you are over age 50—as long as your income is under $153,000 for singles and $228,000 for couples.
As with all tax-favored retirement plans, if you withdraw funds from a Roth before age 59 ½, you will be subject to a 10% penalty. A Roth can be set up at a bank or mutual fund company.
If you have maxed out on IRA contributions and are looking for more tax-advantages ways to save, congratulations—that’s an important milestone in building a nest egg. There are a several other tax-advantaged savings options available to independent workers, with a SEP (simplified employee pension) being a logical next step, allowing contributions up to $66,000 or 25% of your after-tax earnings. Stay tuned for more on this, and other options for independent workers with greater savings capabilities, in a subsequent article.
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