Is it possible for a freelancer making $60,000 in New York City to save for retirement and have health insurance coverage? The biggest difference between W-2 employees and freelancers is that freelancers don’t have existing HR benefits and therefore do not enroll in health insurance or retirement plans. While W-2 workers have access to established employee benefits and group insurance plans, freelancers do everything themselves: sales, marketing, operations, techonology and bookkeeping. For a freelancer, there is no time leftover to setup retirement accounts, research and signup for insurance, and enroll in other tax advantaged benefits.
Let’s take a look at 2 different scenarios of a freelancer in New York City who made a net profit of $60,000 in 2015:
In the first example, the freelancer did not contribute to a retirement plan or have health insurance coverage. They ended up paying $21,000 in Federal, New York State and City Income Taxes, including a $900 penalty for being uninsured.
In the second example, the freelancer gets NY Silver Plan health insurance coverage for the entire year, and contributes $1,200 to a Traditional IRA. As a result, they paid $3,000 less in taxes, going from owing $21,000 to $18,000. Saving for retirement and having health insurance coverage would normally cost $475/mo. However, because these benefits provide a tax deduction, it lowered the cost to $225/month.
If you are a freelancer, make time in your calendar now to do these 3 things:
- Review your budget. What monthly expenses can be reduced or removed by $225, how can you increase your income, or a combination of the two to make up the difference?
- Review health insurance plans and sign up for coverage.
- Open a Traditional IRA account, and setup monthly transfers of $100 to your new account.