‘I entered my 30s last year with little to no savings’: I’m a self-employed individual trying to strategize how to maximize savings with a sizeable increase in income. How should I set up an IRA or 401k to make the most of my new earnings?

Hi Money Minder,

I’m in my 30s, dealing with student loans, a fluctuating income, and life on a budget. But things have taken a turn recently – I’m now looking at making over $85k (around 85k usd) this year and have $70k sitting pretty in the bank.

I’ve got a plan to manage my taxes and maximize my savings with a 0% APR credit card. I’ve even thought about investing in a self-funded IRA or 401k. But, I need some advice on how to set things up for myself. What do you think I should do, and why?

Can’t wait to hear your thoughts!

Best,

Financially Thriving

Response from THE MONEY MINDER:

Hello There,

Congratulations on your substantial income increase and financial progress! It’s great to hear that you are being proactive about managing your finances and considering ways to optimize your savings. Setting up a self-funded IRA or 401k is definitely a wise move, especially considering your fluctuating income and the need to plan for your future.

Given your unique income structure, a self-funded retirement account like an IRA or a Solo 401k can provide you with flexibility and tax advantages. Since you mentioned having a CPA, it’s excellent that you have professional guidance in this area. They can help you determine which retirement account would be most suitable for your current situation and financial goals.

In general, a self-funded IRA allows you to contribute up to a certain limit each year, depending on your age and income level. The contributions are tax-deductible, and the earnings grow tax-deferred until you start withdrawing them in retirement. On the other hand, a Solo 401k is designed for self-employed individuals and allows for higher contribution limits compared to an IRA.

Given your increasing income and interest in maximizing your retirement savings, contributing to a self-funded IRA or Solo 401k can help you reduce your tax liability, grow your retirement savings, and secure your financial future. Make sure to discuss with your CPA to determine the best approach and set up the account correctly to align with your financial objectives.

Best of luck with your continued financial success and growth! If you have any more questions or need further guidance, feel free to reach out to your CPA or a financial advisor for personalized assistance.

Farewell from THE MONEY MINDER.