Dear Liz: I am a freelancer. I don't consider myself a small-business owner, just someone who gets the work done on time and gets paid. I max out my IRA every year, but would like to save more in a tax-advantaged account.
I checked out SEP and SIMPLE IRAs, but they don't have a Roth option. Am I eligible to start an Individual 401(k)? What administrative duties would be involved? I pay self-employment tax and my clients send me 1099s, not W2s.
Answer: You may not consider yourself a small-business owner, but that's essentially what you are. And small-business owners should have tax pros to help them answer questions like this, since you have so many options.
As a sole proprietor, you should be able to set up a solo or individual 401(k) account. That would allow you to make either pre- or after-tax "employee" contributions of up to $18,000 in 2015 — plus an additional $6,000 if you're 50 or older.
As your own employer, you can contribute an additional 25% of your net earnings (a contribution that would be deductible as a business expense). Your total contribution, employee plus employer, can't exceed $53,000 in 2015.
Individual 401(k)s are somewhat more complicated to set up and administer than Simplified Employee Pensions (SEPs) or Savings Incentive Match Plan for Employees (SIMPLEs). But many discount brokerages are eager to help you with the paperwork and have low or no set-up costs.
You have many other ways as a self-employed person to reduce your taxes, but the rules can be complicated. A certified public accountant or an enrolled agent can help advise you of your options. You can get referrals to tax professionals from the American Assn. of CPAs at http://www.aicpa.org and the National Assn. of Enrolled Agents at http://www.naea.org.
Preparing a will or living trust
Dear Liz: I'm a 58-year-old man. I want to make a will just in case something happens to me. I have about $500,000 in stock and cash. I have a life partner and her son. I would like to split my assets between her and my sister. Any suggestions on how to go about this?
Answer: Just in case you turn out not to be immortal, having a will is a very good idea. Otherwise, your assets would be distributed according to state law, which means your lady friend probably would get nothing.
You also may want to consider probate, the court process that typically follows death. While probate is fairly simple in most states, in others — including California — it can be expensive and slow, making a living trust a worthwhile option.
You can prepare a will or living trust using do-it-yourself online legal sites and software such as Quicken WillMaker. If your relatives are likely to contest your will or your situation is otherwise complicated, you should consult with an estate planning attorney for help.
You could provide additional protections and advantages to your partner by getting married. As your wife, she could receive spousal and survivor benefits from Social Security based on your work record. You both would have visitation rights if the other were hospitalized and be empowered to make financial and health decisions if the other were incapacitated.
Marriage can have many other legal, financial and tax benefits as well. If you opt to remain unmarried, please talk to an attorney about available ways you can protect each other's rights.
Applying early for Social Security
Dear Liz: My husband decided we should take Social Security before age 65. I worked intermittently until 67. I do not get half of his Social Security as do many women who never worked. Can you explain why?
Answer: The reason is probably because your own benefit is greater than what you would get as a spouse.
When you apply for Social Security early and have a qualifying work record of your own, you are "deemed" to be applying for both your benefit and any spousal benefit to which you might be entitled. You're essentially given the larger of the two.
Both potential benefits are reduced by the fact that you applied early, and you lost the option of receiving just a spousal benefit for a few years before switching to your own benefit.
This "claim now, claim more later" strategy could have substantially boosted your checks and the lifetime amounts you received from Social Security.
The decision to apply early can be a costly one and shouldn't be made without fully understanding the consequences.
A recently published book, "Get What's Yours: The Secrets to Maxing Out Your Social Security," does a good job of explaining the options. Consulting a fee-only financial planner who is up to date on claiming strategies is a smart idea as well.