Many people now have a side hustle in addition to a full-time job, which can help build up retirement savings more quickly — if funds are allocated wisely. But knowing how to optimize retirement savings when you have multiple income streams can be tricky. What types of accounts should you be using? And how much should you allot to each account?
Consider Opening a Solo 401(k) Plan
You may have access to an employer-sponsored 401(k) plan at your full-time job, but it may be more beneficial to contribute to your retirement savings through a solo 401(k) plan.
“The bonus of setting up a solo 401(k) is that you may be able to contribute both as the employee and the employer, up to annual limits,” said Jay Zigmont, Ph.D., CFP, founder of Childfree Wealth. “Also, since you are setting up your own solo 401(k), you may be able to choose better investing options in your side business than your day job.”
With a solo 401(k), you also have the flexibility to contribute as Roth or traditional.
“This is a way to maximize your tax gains long term, and I highly recommend it,” said Brennan Schlagbaum, CPA and founder of Budgetdog.
“Keep in mind that your employee contributions to a 401(k) are across all of your contributions — both your day job and side gig,” Zigmont said.
Or, Open a Roth IRA for Side Hustle Savings
Doug “Buddy” Amis, CFP, president, CEO and owner at Cardinal Retirement Planning, Inc., typically recommends opening up a solo 401(k) if your side hustle is bringing in five figures or more. If you’re not at that threshold, it could be best to continue contributing as much as you can from your full-time job into your employer-sponsored 401(k) and opening a separate Roth IRA for any additional retirement savings you bring in through your side hustle.
“Consider a Roth IRA and keep track of your contributions,” Amis said. “Contributions can be withdrawn even if you’re well under retirement age and there is no penalty. This is different than traditional IRAs.”
Other Accounts To Consider
Budgetdog’s Schlagbaum says that in addition to employer-sponsored plans, a solo 401(k) and an IRA, you should consider funneling side hustle income into a brokerage account and a health savings account. In terms of how much to allot for each, here’s what he recommends as the ideal breakdown for optimization:
- 401(k)/403(b)/457(b): Contribute enough to receive your full employer match.
- Roth/traditional IRA: Contribute the annual limit ($6,000 in 2022).
- Solo 401(k)/401(k)/403(b)/457(b): Contributions should total 15% of gross income.
- HSA: Contribute the annual limit ($3,650 if single, $7,300 if joint in 2022).
- Brokerage account: Contribute as much as you can.
“Within these accounts, here are some rules to always follow,” he said. “(1) Choose one to five index funds or ETFs and diversify. (2) Turn on dividend reinvestment. (3) Set up automatic investments. (4) Don’t sell anything until you retire.”
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