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The Long Game: 3 Retirement Options for Freelancers

By Susan Johnston June 20th, 2014

Last year, TD Ameritrade’s Self-Employment and Retirement Survey revealed that over a quarter of self-employed professionals in the U.S. weren’t saving anything for retirement. For salaried employees, that number drops to 10 percent. 

“Part of the problem is that it can feel like a feast or famine cycle for freelancers,” said Denise Kiernan, a freelance journalist and co-author of “The Money Book for Freelancers, Part-Timers, and the Self-Employed.” “There’s a tendency to spend more than you should and be more optimistic than you should, she said, “and you haven’t planned for those months when things are going to dry up.”

Saving for retirement can, unfortunately, seem boring and abstract, so June Walker, a tax and financial consultant and author of “Self-Employed Tax Solutions,” frames it in a different light: “I call it the ‘Freedom Account’ because it gives them a chance at some point to do something they wouldn’t necessarily do.”

Since it’s never too early to start planning ahead, here’s a breakdown of several retirement savings options for freelancers:

Individual Retirement Account (IRA)

IRAs come in two flavors: traditional or Roth. With both types of IRAs, you can contribute up to $5,500 in 2014 ($6,500 if you’re over age 50). But IRAs have different tax treatments. Contributions to a traditional IRA are tax deferred. “It reduces your income tax burden now, but later on you’ll pay taxes on it,” explained Jonathan Medows, a Manhattan certified public accountant who advises freelancers on financial issues.

A Roth IRA, on the other hand, is funded with after-tax money, so you aren’t taxed on contributions or growth when you withdraw that money. Both types of IRAs are easy to set up—Medows calls them “low-hanging fruit”—but they have low contribution limits compared to other alternatives.

Simplified Employee Pension Individual Retirement Account (SEP IRA)

A SEP IRA is similar to a traditional IRA but has a much higher contribution limit. In 2014, you could deposit the lower amount of either 25 percent of your total income or $52,000. In order for your money to be tax-deductible, contributions to a SEP IRA or a traditional IRA must be made by tax day of the following year, which may not work for freelancers who regularly file for an extension.

Kiernan and her co-author and fellow journalist Joseph D’Agnese use a combination of SEP IRAs and Roths to ensure a mix of pre-tax and post-tax retirement funds.

Solo 401(k)

Also called a self-employed 401(k), a Uni-k, or an individual 401(k), this type of retirement plan is currently limited to $17,500 ($23,000 if you’re over 50) plus 25 percent of your total compensation. This year, total contributions are capped at $52,000. The rules and requirements are the same as other 401(k) plans, except only you (and possibly a spouse) can be enrolled on the plan.

Medows suggests setting up one of these accounts through a brokerage house or local bank after asking about investment options and fees. If you’re not hands-on with your finances, you may want to choose an index fund. “It’s probably the cheapest type of investment that you can have, and in the long run you’ll do fine,” he added.

And if choosing the type of retirement account seems daunting, consider this: a study published in 2012 found that investing early (asset accumulation) is more important than the actual investments (asset allocation). In other words, it’s better to simply start saving now than to wait and obsess over where to put your money. For the 28 percent of self-employed workers who aren’t saving at all for retirement, that should come as welcome news.

Image by Pedro Ribeiro Simões
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