There is no doubt that the lack of benefits is one of the biggest drawbacks of being an online English teacher. Treating online English teaching solely as a gap year experience is something a lot of young people choose to do. However, the lifestyle is so amazing that you may want to do this on a more permanent basis. If that’s the case, you need to be prepared for retirement. There are several sources that a self-employed teacher can tap for income in retirement. Ensuring you pay your payroll taxes can help you earn credits toward social security benefits. Contributing to Roth or traditional individual retirement account (IRA) is possible if you have US taxable income. However, if you exclude all your income under the foreign earned income exclusion, you may not be eligible to contribute. In previous postings, I’ve discussed the wisdom of having a SEP IRA. I currently contribute to a SEP IRA on behalf of my sole employee (myself).
The issue many people face is that they don’t appreciate the enormity of saving for retirement. If you’re anticipating getting a small check from social security (or no check at all), then you really need to ramp up your private savings. A traditional or Roth IRA will allow you to contribute $6,000 USD per year (again- if you have US income), which isn’t much at all. A SEP will allow you to contribute $56,000 per year or 25% of your salary- whichever is LESS. If you’re making an online teacher’s salary- you’re probably not going to be contributing $56,000. So, without US income to contribute to a Roth or traditional IRA, you’re left with saving 25% of your teaching salary in a SEP. This is probably not going to prepare you for any retirement- much less an early one. A SIMPLE IRA may be the answer.
What is a SIMPLE IRA?
SIMPLE IRA stands for Savings Incentive Match Plan for Employees Individual Retirement Account. As a self-employed individual or an S-Corp, you can set up a SIMPLE IRA, which will allow you to contribute up to $13,500 of your salary to towards a tax advantaged retirement account. Much like the name implies, your employer can match your contribution (up to 3% of your salary). The contributions grow tax free until you decide to take distributions.
What the rules?
SIMPLE IRAs have some complex rules (including those for filing and reporting), so always consult with a tax professional or a financial advisor. Some basic rules are outlined below.
- You must be a business that has less than 100 employees.
- To be eligible, an employee must have earned at least $5,000 in the two previous calendar years and be expected to earn at least $5,000 in the current calendar year.
- You must make employee contributions at the end of each month.
- You must make employer contributions at the end of each tax year.
- Employees over age 50 can contribute an extra $3,000 to catch up for their retirement.
- The employer can contribute either a flat 2% of the employee’s salary or match dollar for dollar up to 3% of the employee’s salary. The employer must contribute whether or not an employee contributes.
- You can begin taking distributions at aged 59 and a half.
- You must begin taking required minimum distributions at aged 72.
What's the better call for a self-employed ESL teacher?
For most ESL teachers who want to maximize their retirement, the SIMPLE IRA seems the better option. Both are pretty easy to set up, but the SIMPLE probably offers the best option for tax deferred savings. The contribution limit ($56,000) is higher for a SEP, but that $56k would need to represent 25% of your total salary- a figure most online ESL teachers don’t reach. If you are earning a higher salary, then the SEP may be better for you. The $13,500 that you are able to contribute to a SIMPLE, along with your employer match, can easily total over $14,000 per year. At $20,000 per year, your employer match would be $600- bring your total contribution to $14,100. By comparison, if you are earning $20,000 and contributing to a SEP, your total contribution would be 25% of your salary, or $5,000. In this case, a SIMPLE is a much better option.
Why a SIMPLE IRA Might Not Be a Good Fit For You
If you really need your teaching salary that comes in every month, then it’s not for you. SIMPLE IRAs have some contribution limits and regulations that make them a bit more cumbersome to deal with than SEP IRAs. There are also regulations regarding transfers. If you’re relying on the bulk of your income to pay the rent and the bills, then stick to a SEP. If you have financial freedom and flexibility, then a SIMPLE might be better for you. I have been contributing to a SEP for many years and considering transitioning to a SIMPLE. At the time, I needed my income to pay down student debt and mortgages. Now, I’m feeling more confident about my own financial future and think it may be time to stick more money into a tax deferred plan. Bear in mind that you can’t have both a SEP and a SIMPLE.
Similarly, if you hope to retire early and are looking to have your dividends help finance your retirement, then a SIMPLE may not be the best option for you. Remember that you won’t be able to touch your money in a SIMPLE until age 59 and a half. If you contribute to a SEP and then put the rest into a brokerage account, while not tax advantaged, you will be able to withdraw your income from the brokerage account whenever you want free of any penalties.
Consider which account suits your situation best. Remember that you need to have earned $5k for the last two years and be in a position to earn at least as much in the current year. So, if you are just starting out, a SIMPLE won’t be an option for you. Whatever you choose, the important thing is to begin saving as much as possible and as often as possible. A SIMPLE is another option to help prepare you for a solid financial future. As always, the information presented here is only informational. You should always check with a financial professional before making any decisions regarding how you invest your hard earned money. Make sure that the rules apply to you and that you are putting yourself in the best position to have a financially stable retirement!