Ask the Captain: Best Retirement Plans for Artists?
Thursday, July 3, 2014
Welcome to "Ask the Captain," a column about finances for theatre artists, where questions sent in by readers like you are answered by our fabulous financial whiz, the Captain! (The Captain's human alter ego is Tom Swift, playwright and do-gooder at Financial Avengers® in San Francisco.)
Send us your questions here!
I have two questions. First, what are the best retirement plans for self-employed artists? Second, how can a self-employed artist reduce their taxable income by making retirement contributions? Every time I try to do a Google search, I get bombarded by ads from your industry and it just makes me feel dirty. This should be easy, shouldn't it?
Wanna Be Easy, Not Dirty
The Captain (in hat) and his business partner, the Oracle. Photo: Keith Brauneis
If you ask me, I wanna be easy AND dirty, but that's an issue for my therapist, not you. And, I digress.
This should be easy, but it's not, and here's why: the United States Congress.
Let's face it, even when Congress is functional, it's dysfunctional. Before you dive into retirement plans and retirement accounts, you need to know this: Congress writes the tax code, Congress makes the rules, and Congress creates the accounts—so Congress has pretty much fucked it up. (No wonder you feel dirty!)
Since Congress is responsible for the tax code, no reasonable human being—let alone an artist—could ever possibly understand it. For example, there are 15 separate types of retirement plans! If you really want your head to explode, you can go to this link and learn all about them.*
* My least favorite of these is called the SIMPLE IRA. It is, of course, anything but. Ten years after they were created, no one understands them, and no one ever opens one. Only Congress could create an account called SIMPLE that isn't.
But let's start here: You should have a SEP IRA.
IRA stands for "Individual Retirement Account."
SEP stands for "Self-Employment Plan." *
* Actually, it does NOT stand for "Self-Employment Plan." In fact, it stands for "Simplified Employee Pension Plan," but it SHOULD stand for "Self-Employment Plan," since that's what the account is: a RETIREMENT PLAN for SELF-EMPLOYED people. DUH! Again, Congress.
A SEP IRA allows self-employed folks to "contribute" (deposit) up to 25% of their gross income into a special retirement account, every year. When you do that, it reduces your reported income accordingly, so you're only taxed on the remaining amount.
So, Easy, it looks like this:
• Let's say I made $30,000 last year acting, directing and teaching. This was all self-employment income, from a bunch of different sources.
• The IRS will allow me to contribute a maximum of 25% of that amount to a SEP IRA. (For you math-impaired folks out there, that's $7500.*)
• If I did this, I would be reporting $7500 less in income: $22,500.
• Consequently, I would have a lower tax liability. (When you report lower income, you pay lower taxes. That part, at least, Congress hasn't screwed up. Much.)
* In the interest of full disclosure, I suck at math. This understandably makes some folks nervous, but let's face it—as artists, don't we agree that math is overrated?
You don't have to contribute the maximum–there's no requirement. But, remember, the more you contribute, the lower your taxes.
How much lower? Oh, jeez, this is where it gets complicated, so remember how I started this column: Congress sucks.
The actual tax savings for your SEP IRA contribution depends on a handful of factors, like your tax bracket, your business deductions, whether or not you're married, whether or not you have kids, etc. But overall, Easy, SEP IRA contributions offer, in my experience, the best tax savings of any retirement account, even if you are only able to make a few hundred bucks a year in contributions.
If you recall my advice in "Ask The Captain: Terrified of Taxes," I suggested that Turbo Tax was a good resource for tax filing. Turbo Tax can also help you determine exactly how much tax you can save on SEP IRA contributions by modeling as many outcomes as you want. Basically, you type in different theoretical dollar amounts for your contributions, and Turbo Tax calculates how much you'll save in each scenario. Neat, huh?
Here's all you really need to know, though: the SEP IRA is our favorite retirement account. It's the most popular retirement account for self-employed folks. And it offers fantastic tax savings.
So, get a SEP, Easy! It's . . . easy!*
* As is always the case, some disclaimers: There is a limit to how much you can contribute in any year to a SEP IRA, but it's so high it doesn't apply here, because we're artists, and don't have that kind of scratch. Lots of other things aren't being covered in this column, but they don't matter, and who has the time for that gobbledygook anyway? Finally, I am not a licensed tax professional, so you should seek the advice of a qualified tax professional before opening a SEP, but you can't afford that, so take my advice and get a SEP.