Financial experts recommend you save $1-1.5 million to retire comfortably. If that number sounds impossible, you may be part of a national trend. According to the US Government Accountability Office, 48 percent of households headed by someone aged 55+ have no retirement savings at all.
If your retirement fund isn’t as large as it should be, launching a side hustle can be a smart way to boost your income and rectify the situation. Here’s what you need to know and do to get ahead:
Track Your Earnings
Side hustles are great because they’re so flexible. Whether you drive with a rideshare company or become a freelance writer, you can work when it’s convenient for your schedule. You can also scale your work up and down to meet your needs. Over time, you could work up to earning thousands of dollars each month.
Because side hustle income can be so variable, diligently tracking your earnings is important. It’s a good idea to open a separate bank account and business credit card solely for your side gig income and expenses so you know exactly how much extra money you have coming in each month.
Consider using a program like QuickBooks, Wave, or FreshBooks to manage your income and expenses. Having a clear picture of your income will help you budget accordingly so you can invest more of your earnings into your retirement fund.
Set Up the Right Accounts
If you have an employer-sponsored 401(k), make sure you contribute enough to get the full employer match. That’s free money you’d otherwise leave on the table.
If you’re operating a side gig with the intention of using your earnings to boost your retirement savings, consider opening a new retirement account in addition to your 401(k). By doing so, you’ll be able to contribute money beyond the maximum allowed by a 401(k). Some options for your side hustle earnings include:
- Traditional IRA: With a traditional IRA, your earnings grow tax-deferred, meaning you only pay taxes on investment gains once you start making withdrawals when you reach retirement. If you’re not covered by a retirement plan at work, you can deduct your total IRA contribution on your tax return. You can contribute up to $6,000 per year ($7,000 if you’re aged 50 or older) into a traditional IRA.
- Simplified Employee Pension (SEP) IRA: Any self-employed individual, including someone with side hustle or freelance income, can open up a SEP-IRA. You can contribute up to 25 percent of your compensation or $56,000 for 2019. Contributions made to a SEP-IRA are tax-deductible and tax-deferred.
- Roth IRA: With a Roth IRA, you make contributions with after-tax dollars. As a tradeoff, your contributions grow tax-free, and you can withdraw money from your account without having to pay federal taxes on it as long as you’re 59.5 or older. As of 2019, you can contribute up to $6,000 per year ($7,000 if you’re 50 or older), so long as you fall within the IRS’s income guidelines.
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Getting set up with these accounts can be easy. You can even open an IRA with an online brokerage firm or robo-advisor like Betterment, Wealthfront, or Wealthsimple.
Remember to Pay Taxes
If you’re earning income from your side hustle — even if only small amounts or you’re only paid in cash — you have to pay taxes on it. If you make $600 or more from a single source, the company that paid you must send a 1099-MISC form detailing how much you earned. However, you owe taxes on any money earned even if it totals less than $600.
You’ll also have to pay estimated taxes each quarter or be subject to costly penalties. If that sounds like a hassle, you can adjust your withholdings on your W-4 at your full-time job to take out more of your income for taxes. By doing so, you can avoid having to pay estimated taxes.
To prevent any surprises, it’s a good practice to set aside 30 percent of your side-hustle earnings in a separate bank account for taxes. That way, you won’t have to raid your savings account when tax season comes around.
Automate Your Savings
Once you’ve opened a retirement account and set aside money for taxes, make sure you deposit regular contributions into your retirement account. You can manually put your earnings into your retirement account whenever you get paid, but it’s both smarter and easier to set up automatic deposits. By automating the process, you ensure money is consistently contributed to your retirement fund no matter what.
If you’re behind on retirement savings, starting a side hustle and investing your earnings in a retirement account can be a smart way to catch up. Whether you decide to deliver groceries or walk dogs, you can boost your income and build a solid nest egg.
Kat Tretina is a freelance personal finance writer based in Orlando.