I never had the sense that there was an end: that there was a retirement or that there was a jackpot.
Leonard Cohen
Listen on: iTunes – Spotify – Soundcloud
Retirement is a strange word for musicians.
Financial freedom – working because you want to, not because you have to – doesn’t work either. Most musicians want to “work” as long as possible.
So what future state are musicians saving towards?
Artistic freedom
Complete control of your creative endeavors.
Imagine making art free of financial, contractual, or commercial obligations.
Does that sound like a way of life worth saving for?
These are the accounts (in no particular order) best suited to achieve artistic freedom as a self-employed musician.
Qualified accounts
There are tax advantages in qualified accounts at three potential stages.
- When money goes in (contribution)
- When money grows (investment growth)
- When money comes out (distribution/withdrawal)
These advantages come with conditions. Notably, the penalty for withdrawing before age 59 1/2 (with exceptions).
IRA (Individual retirement arrangement)
An individual retirement arrangement is a qualified account for one person. You.
It’s easy to open an IRA for free at various custodians like:
The following annual information reflects 2023 IRS rules.
Traditional IRA
A Traditional IRA is a great account to get started.
Contributions lower your taxes today meaning distributions in retirement are taxed. The government will eventually collect that tax by forcing you to withdraw later in life.
| Traditional IRA | |
|---|---|
| Contributions | Tax deductible |
| Investment growth | Tax deferred |
| Distributions | Taxed as ordinary income |
| Early withdrawal penalty (before age 59 1/2) | 10% |
| Annual contribution limit | $6,500 up to compensation |
| Annual catch up contribution | $1,000 if age 50 or older |
| Deadline | Tax day (April 15th, 2024) |
| Required minimum distributions (RMDs) | Age 72 |
Roth IRA
A Roth IRA is a great account to get started with more flexibility.
Contributions are taxed today, distributions are tax free. Therefore the government doesn’t force you to withdraw from this account. Roth holdings are a great way to pass assets to future heirs tax free.
| Roth IRA | |
|---|---|
| Contributions | Taxable |
| Investment growth | Tax deferred |
| Distributions | Tax free |
| Early withdrawal penalty (before age 59 1/2) | 10% (on investment growth) |
| Annual contribution limit | $6,500 up to compensation |
| Annual catch up contribution | $1,000 if age 50 or older |
| Deadline | Tax day (April 15th, 2024) |
| Required minimum distributions (RMDs) | None |
*Contribution limits apply to both Traditional and Roth IRA accounts combined.
SEP IRA (Simplified employee pension)
A SEP IRA is for self-employed musicians who want to save above the limits of traditional and Roth IRAs. Contributions are made as the employer and limited to 25% of compensation.
Work with a CPA to calculate your contribution limit annually.
| SEP IRA | |
|---|---|
| Contributions | Tax deductible |
| Investment growth | Tax deferred |
| Distributions | Taxed as ordinary income |
| Early withdrawal penalty (before age 59 1/2) | 10% |
| Annual contribution limit | 25% of compensation up to $66,000 |
| Self-employed compensation definition | Net earnings minus half of self-employment tax minus contributions |
| Deadline | Tax day (April 15th, 2024) including extensions (October 15th, 2024) |
| Required minimum distributions (RMDs) | Age 72 |
Solo 401(k)
A single member solo 401(k) is for self-employed super savers on the fast track to artistic freedom.
You decide whether to contribute into traditional or Roth buckets and can contribute larger annual amounts as the employee and the employer.
Work with a CFP® professional to help set up, contribute and maintain a Solo 401(k).
| Single member solo 401(k) | |
|---|---|
| Contributions | Traditional or Roth |
| Investment growth | Tax deferred |
| Traditional distributions | Taxed as ordinary income |
| Roth distributions | Tax free |
| Early withdrawal penalty (before age 59 1/2) | 10% |
| Annual employee contribution limit | 100% of compensation up to $22,500 |
| Annual catch up contribution | $7,500 if age 50 or older |
| Annual employer contribution limit | 25% of compensation |
| Self-employed compensation definition | Net earnings minus half of self-employment tax minus contributions |
| Annual total contribution limit | $66,000 |
| Annual total including catch up | $73,500 if age 50 or older |
| Employee deferral election deadline | December 31st, 2023 |
| Employee contribution deadline | Tax day (April 15th, 2024) including extensions (October 15th, 2024) |
| Employer contribution deadline | Tax day (April 15th, 2024) including extensions (October 15th, 2024) |
| Required minimum distributions (RMDs) | Age 72 for traditional holdings |
HSA (Health savings account)
An HSA is a triple tax advantaged account for inevitable medical expenses later in life.
Contributions, investment growth and distributions are tax free when used properly. Distributions are reimbursed from the HSA for medical expenses incurred.
You must have a high-deductible HSA eligible health plan (HDHP) to contribute to an HSA.
| HSA | |
|---|---|
| Contributions | Tax deductible |
| Investment growth | Tax deferred |
| Distributions | Tax free if used for qualified medical expenses |
| Early withdrawal penalty (before age 65) | 20% (if not used for qualified medical expenses) |
| Annual individual contribution limit | $3,850 |
| Annual family contribution limit | $7,750 |
| Deadline | Tax day (April 15th, 2024) |
Non-qualified accounts
High-yield savings account
Most checking and saving accounts at your local bank offer abysmal interest rates (0.01%). An alternative is a “high-yield” savings account for emergencies, large purchases, or other short-to-medium term goals.
Rates will fluctuate, but currently stand over 4% as of October 2023.
NerdWallet updates a monthly list of high-yield savings accounts. Many are online and easy to use. Choose one that is FDIC insured and avoid depositing above the insured limits. Look for minimum balance requirements and a user friendly mobile app.
Interest earned throughout the year is considered taxable income. Look for Form 1099-INT in January or February each year to report on your tax return.
Taxable brokerage account
A taxable brokerage account is effective for musicians saving to achieve early artistic freedom before age 59 1/2.
Withdrawals from this account before age 59 1/2 are penalty free. Any gain is potentially taxed at favorable rates depending how long you held the investment.
A CFP® professional can help you strategize and create a plan that works best for your situation.
| Taxable brokerage | |
|---|---|
| Contributions | Taxable |
| Dividends | Taxed as ordinary income |
| Short-term gain Held one year or less | Taxed as ordinary income |
| Long-term gain Held at least 366 days | Taxed at long-term capital gains rates (0%, 15%, or 20%) |
| Early withdrawal penalty (before age 59 1/2) | None |
| Annual individual contribution limit | Unlimited |
| Required minimum distributions (RMDs) | None |
Start saving
There are many ways to save for artistic freedom. Choose what works best for your desired lifestyle. Then get back to making music.
This post is not comprehensive.
Refer to the IRS website for more details and rules.
Work with a CFP® professional (certified financial planner) to develop a strategy unique to your situation and a CPA (certified public accountant) to follow the guidelines of tax-advantaged retirement accounts.
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