More and more people are starting up a side hustle in 2022 due to the financial uncertainty of the last few years and the increasing overall popularity of the gig economy. Over one-third of the U.S. workforce has a side hustle that they rely on for extra income. Whether you’ve been working on your side hustle for a while or are looking to get the most out of the extra income, we have some tips that could have you saving some money come tax-return time.
Why You Should Be Putting your Side Hustle Income into a Retirement Account
If you have self-employed earnings, you could be paying more in payroll taxes for your earnings than on an employee’s income.
Put your side hustle income in a non-Roth retirement account or other tax-advantaged accounts. You can reduce your total tax liability.
Types Of Accounts You Can Open
Firstly, if you have an employer-sponsored 401(k) plan, you need to make sure that you are contributing enough to get the full employer match. If you don’t do this, make the change now, as you could be losing money otherwise.
Now, let’s talk about your side hustle. If you want to use your side hustle earnings to add to your retirement savings, you should open a new retirement account. So you’re contributing to both accounts, maximizing your savings, and reducing your total tax liability.
If you have a traditional IRA, then your earnings grow tax-deferred. You only pay taxes on your investment gains when you start withdrawing from them. For a traditional IRA, you can contribute $6,000 per year and $7,000 if you are 50 or over. Suppose your employer doesn’t give you a retirement plan. In that case, you can deduct your total IRA contribution on your tax return.
You can make contributions with after-tax dollars if you have a Roth IRA. Your contributions into the Roth IRA will grow tax-free. Once over the age of 59.5, you can withdraw money from your account with no requirement to pay federal taxes on it.
You can also contribute $6,000 per year and $7,000 if you are 50 or over, as long as you meet the IRS’s income guidelines.
Simplified Employee Pension (SEP) IRA
People who are self-employed and have earnings through their side hustle can open a SEP-IRA. You can contribute up to 25% of your compensation. With a SEP-IRA, the contributions that are made are tax-deductible and tax-deferred.
You can get a financial advisor to help you set up a self-employed retirement plan if you don’t know what you need to do.
The information in this article is intended purely as suggestions and is not financial advice. Please consult a financial advisor before following any of the information in this article.
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