Ah, the Freelance Life: No Time Clock, No Big, Bad Boss--and No 401(k) Plan
Q. I work as a freelance editor in the entertainment industry and made about $100,000 last year. My wife works as a staff development assistant and makes about $40,000. Because she is a staff member, she can (and does) contribute to a 401(k) plan. Because I am not a staff member, even though I get paid in W-2 income, I can’t contribute to a 401(k), although I do save $2,000 a year in an individual retirement account. I am amazed that she already has a retirement account twice the size of mine, yet I started contributing three years earlier. It seems unfair that a freelancer does not have the same benefits as a staff employee. Are there any ways I can catch up?
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A. Someone who works in Hollywood is surprised that life is unfair? Maybe it’s time to head back to Dubuque after all.
The best thing that you can do at this point is to make sure your wife contributes the absolute maximum to her 401(k). You’ve seen for yourself what a powerful savings vehicle these plans are, and you get that nifty tax break too. Since retirement savings accumulated during a marriage are considered community property, you’ll get a share of that money even if you break up. (Sorry to bring up divorce, but again, you do work in the Industry.)
Since all your income is reported to you and the IRS on W-2 forms, you can’t take advantage of most of the retirement savings plans available to the truly self-employed, such as SEP-IRAs and Keoghs, which give you an immediate tax break plus tax-deferred growth. You can, however, use some of that six-figure income to contribute $2,000 to a nondeductible Roth IRA each year for your wife in addition to the one you’re funding for yourself. The big advantage of a Roth IRA, of course, is that you withdraw the money tax-free in retirement.
If you belong to a union, you probably also qualify for some type of pension. Don’t discount the importance of this: A pension is a union or company promise to pay you a set monthly amount in retirement. Contrast that with a 401(k), which offers no such guarantees. If you invest your 401(k) badly, you suffer the result; if your company or union screws up its pension investments, it still has to pay you your benefit (or the government does if the plan goes bankrupt). The longer you belong to a union or work for a company that has a pension, the bigger the benefit you should ultimately receive.
You also can consider purchasing a variable annuity, which would allow you to invest in stocks and other growth investments inside a tax-deferred account. Annuities have significant drawbacks: Your contributions are not tax-deductible, annuities can carry hefty fees, and you’ll need to do some pretty serious research to find the right one. The woods are full of commission-hungry insurance salespeople eager to shoehorn you into an overpriced investment. There are many financial planners who eschew variable annuities altogether and recommend that you invest on your own, using growth stocks and municipal bonds to lower your tax bill, but that will also require some significant research time on your part. Or you can consider investing in a mutual fund that mimics a stock market index, such as the Standard & Poor’s 500. Index funds tend to have low turnover, which means low exposure to taxes, although you’re exposed to every hiccup in the stock market.
Your final option, and one you’ve probably thought of by now, is to get yourself one of those cushy staff jobs. For all the joys of freelancing--setting your own schedule, three-hour lunch breaks, wrestling with impossible clients with absolutely no corporate backup--you can’t discount the considerable benefits of a health plan, vacation pay and retirement savings options. Life as a corporate cog has its advantages.
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Q. I am trying to find info on the value of a company car. My sister is considering a move from Sacramento to Orlando. She has the cost-of-living information, but she will be losing her company car and needs to know what it is worth in order to make an informed decision. Do you know where I can find this information?
A. She could ask her employer, of course. But if this is the kind of career move made without the full consent and cooperation of her present employer--in other words, if she’s not being fired--she might want to be more discreet.
The nearest proxy might be finding out the cost to lease a similar car in Orlando. An auto dealership there might be able to help her, or she could ask whoever is recruiting her to give her a hand.
Liz Pulliam is a personal finance writer for The Times and a graduate of the certified financial planner training program at UC Irvine. She will answer questions submitted--or inspired--by readers on a variety of financial issues in this column. She regrets that she cannot respond personally to queries. Questions can be sent to her at liz.pulliam@latimes.com or mailed to her in care of Money Talk, Business Section, Los Angeles Times, Times Mirror Square, Los Angeles, CA 90053.
