Retirement Accounts for Streamers

12Mar 2018 by Galen

Moblord’s Mean Retirement Intro:

Look, you’re probably a great broadcaster. People like you. People sub and donate to you. But what I’m about to say is going to seem pretty harsh: You almost certainly won’t retire as a career-long broadcaster. Really not a reflection on you personally as much as it is just a numbers game. Less than 1% of broadcasters are partners and less than 1% of partners made over $20k last year. It’s similar to the kind of numbers from sports or acting, so not totally unique, but it’s rare to hear anything but the winner’s stories told. Those who don’t make the 1% of the 1% go on to do other things with the rest of their lives and it becomes just a great story for the grandkids. Even if you do retire from broadcasting, will it still be the same kind of thing you’re doing now? Will Twitch even exist in 10 years? But because the guidelines below apply to a lot of career paths and streaming can be a supplemental income, not just a full-time choice, this article will still do you some good, so listen up.

Galen’s part:

If you are a full time content creator you need to be saving for your future, especially retirement. If you’ve gone full time before you can afford to put some money away, you’d better have a plan to get there soon, otherwise you’ve probably jumped the gun. Subsistence living is not a long term viable plan; the realities of money issues can remove the joy from streaming, and prevent you from achieving long term stability in this career. I’m going to cover the different types of retirement accounts for streamers, and the circumstances in which each type might make sense.

You chose to have your business be your full time endeavor; make the right choice to learn about your retirement options. The IRS also has a lot of information on this topic.

There are four very important qualifications I need to make before you dive in to this article. First, I’m assuming that you’re the only employee of your business. There is a LOT more complexity if you have other employees. Second, I’m not a CPA and for several of these plans you’ll need to work with your CPA to see how much you can contribute. Let me know if you need help finding a CPA who knows Twitch. Third, I’m writing this in 2018. The numbers will likely change annually and some relevant laws may change. Finally, while there are tons of retirement plan options, I’ve pared down the list to the ones that I think will cover the majority of full time streamers.

Housekeeping

Retirement is an unfortunately complex topic. That means there are a lot of ways to go wrong, but it also means you can usually find something that really matches your situation if you’re diligent. In this section I’m going to go through some housekeeping and terminology that you should know for the rest of the article.

Terms

IRA: Individual retirement account/arrangement.

Qualified plan: A plan that meets the requirements the IRS put in place. This gives the plan ERISA (defined later) protections.

Non-qualified plan: A plan that does not meet the qualified plan requirements.

Traditional: In this context, when I’m referring to a retirement plan as a traditional plan (or just not specifically naming it) I mean that your money goes in pretax. That means you get a tax savings today and pay taxes on the money when you take it out of the account

Roth: A Roth account is retirement account where your money goes in after taxes. That means you pay the tax today but when you take the money out you aren’t taxed.

Early withdrawal: Retirement accounts generally come with penalties for removing your money before age 59.5, however there are some circumstances where it can be 55. This is designed as an incentive to use the tax benefit to actually save for retirement.

Defined Benefit (DB): A defined benefit plan is when the payout is guaranteed.

Defined Contribution (DC): A defined contribution plan is when the pay in is guaranteed but the subsequent payout depends on other factors like market returns.

ERISA: Employee Retirement Income Security Act of 1974. This is the law that set a lot of the legal protections on qualified retirement plans.

AGI: Adjusted Gross Income. This is the figure on which you would then deduct your itemized or standard deduction to reach taxable income on which you pay taxes. Check out this article for more info on calculating AGI.

Single: This refers to your tax return filing status.

MFJ: Married filing jointly. This refers to your tax return filing status.

Phase out: Some plans restrict (phase out) your ability to contribute to the plan based on your income.

Tax

You should talk with a CPA before making decisions on which plan makes the most sense for your business. There are a lot of specific interactions between self-employment income and retirement savings that can dramatically change which plan makes the most sense for you. Plus, for several of these plans, you need a CPA to help you figure out how much you can contribute.

I’ve also not included several aspects of retirement planning that go into effect when you’re 50 and age 70.5. I assume that most of the broadcaster audience isn’t in that range. If you are and want to know more about what I excluded from this for clarity, get in touch with me.

Random positives

  • Retirement accounts aren’t counted as assets when calculating your Expected Family Contribution for college financial aid. While this might not be relevant to you now, it’s a material benefit over non-retirement accounts if you expect to contribute to a kid’s college funding later.
  • Since the assets in a retirement account are generally inaccessible without penalties until later in life, you’re more likely to leave them alone. That’s a positive for your long term savings and is a great use of mental accounting.
  • The younger you start building a savings habit, the more money you’re likely to have in the long run.
  • The more flexibility you give yourself at tax time and at retirement, the more opportunity you have to make smart decisions. If you’re playing Starcraft or League, are you more likely to win with a flexible comp/build with multiple win conditions or with something rigid?

Personal accounts

There are three main personal accounts you can use as retirement vehicles. You do not need to have a business to set up these accounts but you can use them in addition to your business accounts. Since you fully control the account, these often can be a top savings priority. You can open them at pretty much any financial institution on your own.

Traditional IRA

A traditional IRA is a retirement account that lets you save money on a pre-tax basis. This is the “standard” individual retirement account.

Stat sheet

You can save $5,500 annually with an IRA. Your ability to deduct your contributions to a traditional IRA phases out based on your income. If you’re making less than $63,000 single ($101,000 MFJ) your contribution is fully deductible and that deduction phases out up to $73,000 single ($121,000 MFJ).

Those phase outs assume you’re covered by a retirement plan at work. If not, then your contributions are fully deductible. If you have a spouse who is covered by a plan at work your deduction starts phasing out at $189,000.

Once your money is in a traditional IRA you would pay a 10% penalty, in addition to income tax, on any early withdrawal. You can take money out of a traditional IRA without penalties to pay for death of the owner, disability, paying for higher education, up to $10k for first time homebuyers, or to cover medical expenses that are more than 10% of your AGI.

Pros

  • Tax savings today.
  • Easy to set up.
  • Up to 1.2+ million dollars in an IRA is protected from creditors during a bankruptcy.
  • You have a high level of control.

Cons

  • Non-qualified and therefore missing ERISA protections.
  • Relatively low contribution limits.
  • The people who would most want to save on taxes today (high income earners) are often phased out of deducting traditional IRA contributions.
  • A high level of control also means a high level of responsibility. You need to make sure the account is invested appropriately for your goals.
  • Once money is in a traditional IRA you will generally pay penalties if you want to take it out.

Roth IRA

With a Roth IRA you can save money on an after-tax basis. Once you save it, the money isn’t taxable when you take it out during retirement! This strategy can make a lot of sense if you’re paying less in tax today than you think you might in the future.

IRAs share a contribution limit meaning you can contribute your max amount fully into a Roth, fully into a traditional, or spread across the two.

Stat sheet

You can save $5,500 annually with a Roth IRA. Your ability to contribute to your Roth IRA phases out based on your income. If you’re making less than $120,000 single ($189,000 MFJ) you can fully contribute to a Roth. That ability phases out up to $135,000 single ($199,000 MFJ).

Once your money is in a Roth IRA you would pay a 10% penalty, in addition to income tax, on any early withdrawal of investment growth. You can withdraw your contributions without penalty if you’ve had the account for 5 years. Additionally, you can take money out of a Roth IRA without penalties to pay for death of the owner, disability, paying for higher education, up to $10k for first time homebuyers, or to cover medical expenses that are more than 10% of your AGI.

Pros

  • No taxes in the future.
  • Easy to set up.
  • Higher phase out than traditional IRA.
  • You can take out your contributions at any point without penalty if you’ve had the account for five years.
  • Up to 1.2+ million dollars in an IRA is protected from creditors during a bankruptcy.
  • You have a high level of control.

Cons

  • You’re paying taxes today.
  • Relatively low contribution limits.
  • Non-qualified and therefore missing ERISA protections.
  • A high level of control also means a high level of responsibility. You need to make sure the account is invested appropriately for your goals.

Health Savings Account (HSA)

A Health Savings Account is an account designed to help you pay for healthcare costs. If used properly, you can put in money pre-tax, it can grow without tax, and you can take it out tax free! Additionally, once you’ve reached age 65 you can take the money out for any purpose.

The contribution limits for an HSA are completely separate of any other type of account. Theoretically you could have a business retirement account, personal account, and an HSA and save into all of them.

Stat sheet

You can set up an HSA if you have a high deductible health plan (HDHP). That’s a health insurance plan where the minimum deductible is at least $1,350 single ($2,700 MJF) and your maximum potential out of pocket is $6,650 ($13,300 MFJ).

Assuming you meet that, you can set up an HSA just like you would an IRA. Once you have the account you can save $3,450 ($6,900 MFJ) with a $1,000 catch up contribution.

There is no phase out for contributing to an HSA.

Pros

  • If used correctly, the money is never taxed!
  • You can take money out to pay medical bills (not health insurance premiums) at any point.
  • Easy to set up.
  • You have a high level of control.
  • No phase out.
  • You can invest your HSA so that it grows over time if you don’t need to pay medical bills today.
  • Portable.

Cons

  • Requires a HDHP. This can make sense if you’re young and healthy but might not be a smart option for a lot of people.
  • Later withdrawal date (65 vs 59.5 for IRA) for non-medical purposes.
  • 20% early withdrawal penalty (vs 10% IRA).
  • A high level of control also means a high level of responsibility. You need to make sure the account is invested appropriately for your goals.
  • Your HSA has no creditor protections, unless specifically allowed in your state.

Business accounts

You can only set up these types of accounts if you own a business. Fortunately, if you’re an income-earning streamer, you own a business! Unfortunately, there are a lot of decisions to make on which type of plan makes the most sense for you.

One really cool thing about these business plans is that you can open one in addition to your personal account.

SIMPLE

SIMPLE stands for Savings Incentive Match for Employers… which was just to give it a name to indicate that it is, in fact, simple to implement. They’re designed for small businesses and are easy to establish and maintain. They don’t have some of the nondiscrimination testing that other plans have and there are no annual filing requirements.

Stat Sheet

You can elect to defer up to $12,500 of salary. Additionally, the business must match up to 3% of salary or make a non-elective contribution of 2% to all employees. Since we’re assuming you’re the only employee of your stream it makes sense to give yourself that 3%.

For example, if you made $50k last year you could contribute up to the $12,500 as the employee and match another $1,500 as the employer. If you only put in $1,500 as the employee you could still put in $1,500 from the business.

The contributions you make as the employee are tax deductible to you and the contributions you make as the employer are tax deductible to the business. Additionally, the employer contributions or match are not subject to payroll taxes.

Pros

  • Incredibly easy to set up and maintain, compared to other plans.
  • Lets you save on taxes today.

Cons

  • You can only make contributions for a year within that calendar year.
  • Lower contribution limits than other plans.
  • You are not allowed to have any other kind of retirement plan in your business if you have a SIMPLE.
  • Non-qualified.
  • Higher early withdrawal penalties in the first two years of the plan.

SEP IRA

A SEP (simplified employer pension) IRA is a non-qualified business retirement plan. It’s generally easier to establish and administer than a qualified plan. It also lets you potentially save more than a SIMPLE but does take more input from your accountant.

Stat Sheet

You can contribute the lesser of 25% of your compensation (or 20% of net self-employment earnings) or $55,000 to a SEP IRA. This is a contribution from the business and not salary deferral.

You can establish a SEP as late as your business’s tax filing date. This is because you often don’t know how much you can contribute until you’ve done your taxes.

Employer contributions are tax deductible to the business. Additionally, the employer contributions or match are not subject to payroll taxes.

Pros

  • You save on taxes today.
  • You can establish a plan and make contributions until your tax filing.
  • You can potentially save more money than a SIMPLE or traditional/Roth IRA.
  • Relatively low administrative costs.
  • Easy to set up.
  • No phase out.

Cons

  • Depending on your income, you might be able to contribute less than you could to a solo 401(k).
  • You can’t take loans from a SEP.
  • Non-qualified.
  • Limited creditor protection, similar to an IRA.

Solo 401 (k)

A solo 401(k) is just like a 401(k) you might have from an employer. The only difference is that you’re the only plan participant, which makes life a lot easier. When there are multiple participants you need to follow all sorts of rules to make sure you’re being fair. When it’s just you there’s no one for you to be unfair to, so you can go wild.

Stat Sheet

Like a SEP, you can save the lesser of 25% of your compensation (or 20% of net self-employment earnings) or $55,000. There’s one key difference, however. With a 401(k) you can defer up to $18,500 of salary and then use business contributions to make up the rest of the potentially $55,000. This matters because you can defer up to 100% of your income which means there’s more you could put away early on.

For example, if you earned $50,000 from your business and had a SEP you could only save $10,000. With a 401(k) you could theoretically save $28,500 (20% of $50,000 + $18,500). 

Additionally, your employee salary deferral can be a Roth contribution. Your employer contribution is always traditional. That means that if you were earning more than the phase out for a Roth but wanted to do a Roth contribution this would be a good vehicle.

Employer contributions are tax deductible to the business. Additionally, the employer contributions or match are not subject to payroll taxes.

Pros

  • Can save more at lower income levels than a SEP or SIMPLE IRA.
  • You can make both Roth and traditional contributions. That means you could choose whether it’s more important to save on taxes today or in the future.
  • No phase out.
  • Can take loans if needed.
  • Can contribute to a solo 401(k) until tax time.
  • A 401(k) is a qualified plan with full ERISA protections.

Cons

  • Often higher administration costs than a SEP IRA. This is decreasing but is still generally true.
  • More paperwork to set up and a SEP or SIMPLE.
  • Must be opened by the end of the year for which you want to make contributions.

DB Pension

This is a whole different beast from everything we’ve mentioned before. If you’re not earning several hundred thousand dollars AND are over 50 then odds are this isn’t your best option. Still, you never know.

Stat Sheet

Depending on your income and age you can save up to $220,000 into a defined benefit pension.

Pros

  • You can potentially save a ton of money
  • Plan contributions are generally 100% tax deductible.

Cons

  • Extremely high ongoing administrative costs.
  • You need to be older and have very high income to take full advantage of a DB pension.
  • Must be opened by the end of the year for which you plan to make contributions.
  • Limited flexibility. Once you set a contribution level you’re fairly set in continuing at that level.

Conclusion

There’s a ton to consider when putting together a plan for retirement savings. Both fortunately and unfortunately, you have a lot more options as a business owner. We’ve covered the ones that are most likely to match what you need in this article.

You don’t have to figure this out alone. This is what we do- help streamers and young professionals make great money decisions. If that’s something that sounds interesting to you, reach out to me or schedule some time for a free consult. You can check out what I do here.