How to Save for Retirement as a Freelancer

Believe it or not, 52 percent of Americans over the age of 55 have no retirement savings. Zilch. Nada. Nothing. I would bet that a big portion of these folks work as freelancers. Without sponsored 401k’s, it’s easy for freelancers to forgo retirement plans altogether, leaving them behind their peers.

As independent contractors, we need to prepare for retirement way, way in advance. The biggest barrier to our contributions is not limited income or higher taxes — it’s a lack of clarity around the options. We’re making it easy for you. Here’s everything you need to know to jumpstart your retirement savings:

Know Your Options

You don’t have an employer to lead you in the right direction, and as an independent contractor you face a buffet of options for your retirement savings. We highlighted the most popular four choices, with some notes on their strengths and potential drawbacks:

Traditional IRA (Individual Retirement Arrangement):

  • Contribution Limit: $5,500 (combined for a traditional IRA or Roth IRA.)
  • After age 50, the contribution limit raises to $6,500.
  • Pre-tax: you have to pay taxes when you retire.
  • Setup Deadline: April 15 or your tax-filing date.
  • You benefit from a tax break.
  • Once you reach 70½ years of age, you can no longer contribute.

Great For: Freelancers who surpass the Roth IRA limits (see below), and would like a tax break.

Roth IRA:

  • Contribution Limit: $5,500 (combined for a traditional IRA or Roth IRA).
  • Post-tax: no tax break (you pay the taxes upfront, not when you withdraw).
  • Setup Deadline: April 15 or your tax-filing date.
  • Cannot withdraw any earnings until age 59 and five years after your last contribution.
  • Income limits based on your modified adjusted gross income (MAGI). Check out the limits below:
freelancer retirement

Image Source: IRS

Great For: Young freelancers within the income requirements who benefit from paying low taxes now and withdrawing appreciated funds much later. Most experts believe Roth IRA’s are the best option for anyone within the stated income limits.

Solo 401(k):

  • Contribution Limit: $17,500 per year ($23,000 for people over 50.)
  • After-tax: you don’t have to pay taxes when you withdraw the money.
  • You benefit from a tax break.
  • Setup Deadline: December 31
  • Solo 401(k) enable you to take out loans on your investments.
  • In addition to the contribution limit, you can add up to 20% of your profit as a sole proprietor LLC and 25% of your business's profit.

Great For: Freelancers who think they will fall in a low tax bracket during retirement and don’t mind a bit of paperwork. Solo 401(k)s are great for freelancers who may need to take out a loan or need to double-down on their retirement contributions later in life. Solo 401(k) will probably help you save more if you’re in a high tax bracket.

SEP IRA (Simplified Employee Pensions):  

  • Contribution Limit: 25% of your total compensation or $52,000 for the tax year.  
  • Pre-tax: helping you into a lower tax bracket.
  • Setup Deadline: April 15 or your tax-filing date.
  • 10% withdrawal penalty for people under 59½.

Great For: Independent contractors who want an easy setup and low administrative responsibilities. SEP IRAs are slightly easier to set up than Solo 401(k)s, and work on employer rather than employee contributions. You can also convert an SEP IRA into a Solo 401(k) down the line if you want a change.

A Note on Keoghs:

You may see Keoghs listed in some older articles about freelancer retirements. This investment vehicle lost popularity because of the complexity of the setup and changes in the tax code. We recommend sticking with a SEP IRA or hiring a financial consultant to help you start with a Keough.

Most freelancers mix and match different options, opting for a Roth IRA and SEP IRA or 401(k). If you want more help choosing your best combination, think about talking to a financial counselor — just be wary of percentage rates. Instead, try to find someone with a flat fee.

Rollover Retirement Savings

Most freelancers don’t start working for themselves straight out of high school or college. If you accrued retirement savings in your past jobs, roll them over into your new accounts. Too many people lose out on that money, forgetting about it completely. By reaching out to the financial institution that sponsored your 401(k), you can get the process moving. Check out the IRA’s rollover chart for details about the best accounts to transfer your retirement savings:

rollover chart

Image Source: IRS

Set Your Contribution Rate

Most experts suggest saving between 10 to 20 percent of your income for retirement, depending on your age, expected retirement salary, and current savings. Check out Vanguard’s calculator to help you find the best amount for your financial needs.

Some freelancers adjust their contributions based on their current income. When they take on a big project, they put a big slice of it toward their retirement. If you can afford it, saving for retirement when earnings are good gives you flexibility during low-income months. Even if you can’t save a solid 10 percent of your income, start small.

Begin Saving ASAP

Since retirement savings accumulate over time, it pays to invest earlier rather than later. As CNN Money explained, if you put away $3000 a year between the ages of 25 and 35, when you reach 65, your funds will have reached $472,000. But if you start saving at age 35, and put $3000 a year into a retirement account for 30 years, your fund will only grow to $367,000 even though you invested 60,000 more. The sooner you can start saving, the easier you’ll make it once you start to near retirement age.

Elizabeth Wellington is a freelance writer, editor, and content strategist who lives to tell stories. You can find her with a cup of tea in hand, scratching away in her favorite notebook.

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