But how do you do it?
As a tattoo artist you're an independent contractor, which is essentially a business of one.
This means the shop doesn't have to offer benefits like a retirement plan.
You're on your own.
You don't have the option to contribute to an employer plan, like a 401(k).
Nope - saving for your retirement is completely on you.
Do you throw money into a savings account and hope one day there's enough or is there a better option?
Luckily you have options. There are three options that I typically review with clients, each with their own pros and cons, and all of them much better than a savings account.
As a tattoo artist, your three options to save for retirement are:
You may be familiar with the Traditional or Roth IRA.
When it come to retirement savings, they're relatively common because they're simple to set up, and you're able to contribute regardless if you're an employee or business owner.
Before we go any further let's discuss the difference between a Traditional and Roth IRA.
The contributions (deposits) to Traditional IRAs are deductible, or pre-tax, meaning they help lower your taxable income for that year.
The contributions to Roth IRAs are non-deductible, or post tax. This means you pay the taxes now and it does not affect your taxable income for that year.
The choice between contributing to a Roth vs Traditional IRA isn't always straightforward.
There are few questions to ask to help determine which is better for you. However, there is one factor that will quickly rule out the Roth IRA - how much money you make.
If you're single and earn more than $140,000 or married and earn more than $208,000, you aren't eligible to contribute to a Roth IRA (these numbers are for 2021).
If you're interested to see the full list of questions, you can download the flowchart I use with clients here:
The primary con of a Traditional or Roth IRA is the contribution limits.
For 2021 you are only allowed to contribute $6,000 per year (and an extra $1,000 if you're over 50).
For some people this works fine. But for anyone that wants to boost their retirement savings, this contribution limit can be limiting.
So what options do you have if you want to save more than $6k?
You can utilize another version of the IRA, a SEP IRA, or a solo 401(k), which is exactly what it sounds like - a 401(k) for one person. Unlike the Traditional and Roth IRAs, both of these accounts are tied to your business.
Let's look at the SEP IRA first.
These accounts allow you to contribute SIGNIFICANTLY more.
The contribution limit for 2021 is $58,000 or 25% of income (not to exceed $58k).
There are two caveats here - these contributions can only be made BY THE BUSINESS and if you hire any employees, like an assistant, you have to contribute the same percentage of income that you contribute for yourself.
So if you have an employee that you pay $30,000 per year and decide to contribute 25% of your income to a SEP IRA, you'll also have to contribute $7,500, or 25%, to a SEP IRA for your employee.
This can add up quick, even after factoring in the deduction that the business receives for those contributions.
However, if you don't have employees the SEP IRA can be a great option. It has high contribution limits and it's relatively easy to set up and maintain.
Lastly - the Solo 401(k).
These are similar to your typical 401(k) offered by many employers, except they're for solo business owners.
If it's just you - no employees - then you have the option to open a solo 401(k).
The contribution limit is similar to the SEP IRA at $58,000. However, there is a difference.
As the employee (yes, even if you're self employed you're considered the employee) you can contribute $19,500 (and an extra $6,500 if over 50). You can even make these as Roth contributions!
The employer (your business) can contribute up to $38,500 (not to exceed 20% of net income if you're a sole proprietor).
The employee contributions are deductible to the employee (it lowers your taxable income) and the employer contributions are fully deductible to the business.
There is one special exception when it comes to the "no employee" rule. If your spouse is actively involved in the business or is a part owner, you can open a solo 401(k) for them as well.
Think you may hire someone in the future? No worries - the solo 401(k) can be converted to a traditional 401(k) at that point.
So how do you decide which plan is right for you?
You need to look at how much you are currently earning, how much you're willing/able to contribute, and your future plans of hiring employees (or not).