4 Strategies for Using Side Hustles to Fund Retirement Savings – NerdWallet

In the beginning of 2022, I panicked after realizing I used to be in my early thirties with solely about $4,000 saved for retirement. As soon as the panic subsided, my resolution was to make use of aspect hustles to fast-track my retirement financial savings. Inside two years, I used to be in a position to make use of my freelance and 9-to-5 earnings to develop my retirement financial savings by over $100,000. Listed here are some methods I used to realize my objective.

Over time, I hadn’t put a lot thought into after I wished to retire or how a lot I would wish. I received began by studying on-line articles and utilizing a retirement calculator.

Drafting a retirement plan was a cathartic course of — it challenged me to consider what life-style I would like throughout retirement and the way a lot that would value. I landed across the $2 million mark, which was initially a shock to my nervous system as a result of I solely had round $4,000 saved. I arrived at this quantity by inputting my perfect retirement age, life expectancy, month-to-month contribution, month-to-month finances and different variables right into a retirement calculator.

The retirement calculator additionally helped me break down how a lot I wanted to avoid wasting month-to-month to succeed in my lofty objective.

Earlier than trying to find freelance gigs, I wished to verify I had an investing technique in place. It’s straightforward to spend freelance cash earlier than it hits your checking account; I might know as a result of I’ve completed it one too many instances.

“As a aspect hustler, your go-to accounts for saving for retirement are the IRA, the Roth IRA, the SEP IRA and a solo 401(ok),” says Alleson Tate, an authorized monetary planner and founding father of Avere Wealth Administration in Atlanta. A majority of these accounts may help maximize retirement and well being care financial savings.

To hit my month-to-month financial savings objective, I deliberate to divide my aspect hustle earnings into 5 pots: my emergency financial savings fund inside a high-yield financial savings account, my 401(ok), an IRA, a well being financial savings account and a regular brokerage account. I additionally deliberate to max out my allowable contributions to my 401(ok), HSA and IRA as my earnings elevated.

Ultimately, I discovered a number of constant freelance writing gigs by specializing in securing high-paying shoppers who would offer constant work over an agreed time frame. I used to be a daily contributor for some on-line platforms and likewise had personal shoppers to whom I supplied articles. I used job boards, chilly emails and tapped my community. Though most of my freelance earnings was constant, some contracts did not get renewed. This meant I needed to have a stable finances in place and revisit it frequently to remain on high of my saving objectives.

Tate suggests utilizing a 50/30/20 budgeting system to handle your aspect hustle earnings, which NerdWallet additionally recommends for main earnings. With this methodology, 50% of take-home earnings goes to wants, 30% to needs and 20% to financial savings, debt and investments.

“Everybody’s percentages should be adjusted in accordance with their very own life-style and monetary priorities,” Tate says. “However that may be a very nice beginning place.”

I used to be continuously adjusting my finances allocations. Some months, I used to be investing an excessive amount of and didn’t have sufficient in my emergency fund, whereas different instances, I wasn’t leaving sufficient for payments. I went overboard with the leisure and self-care bucket just a few instances, and through months after I had much less aspect earnings, I needed to scale back my financial savings.

Throughout my first 12 months of aggressive aspect hustling, I wished the moment gratification of seeing my retirement financial savings develop. I made a decision to prioritize saving and waited to pay Uncle Sam in a single lump sum throughout tax season. Earlier than making that call, I ought to have learn the IRS’ superb print about self-employment taxes. Studying that would’ve saved me the penalty I needed to pay that 12 months.

The self-employment tax charge is 15.3% for 2023 and 2024. To keep away from an underpayment penalty, you’ll typically have to owe underneath $1,000 in taxes after minusing any withholdings and refundable tax credit. Or, you would wish to have paid withholding and estimated tax of both 90% of taxes from the present 12 months or 100% of taxes from the earlier 12 months. You are able to do this by paying the IRS estimated quarterly taxes or by withholding sufficient taxes out of your W2 earnings.

To assist calculate this, Abraham Ziadeh, a CPA and proprietor of an authorized public accounting agency in Pembroke Pines, Florida, suggests utilizing bookkeeping software program, an accountant or a CPA.

I selected the W2 route and labored with a monetary advisor to calculate how a lot I have to withhold to keep away from one other penalty.

I additionally determined to study methods to cut back my self-employment taxes. One technique my tax advisor recommended was to alter my enterprise construction from a single member LLC to an S company. If in case you have constant earnings and fulfill the necessities, incorporating your online business may make it easier to save on taxes, particularly when you select an S company construction, Ziadeh says.

Leveraging a self-employed retirement account was one other strategy to scale back my tax invoice. I went with a SEP IRA, since you possibly can contribute the next quantity than you possibly can with a Roth. Tate says SEP IRAs are her most popular accounts since they scale back your taxable earnings and have a comparatively excessive contribution restrict.

That stated, it’s necessary to decide on an account that works greatest to your monetary scenario.