A Quick and Dirty Guide for Freelancers Who Need to Start Saving for Retirement (Like, Now)By Allie Gray Freeland October 17th, 2019
When it comes to retirement, many freelancers write it off as a pipe dream—they simply don’t think it’s possible to put coin away. But here’s the thing: even free-wheeling artists need to save.
“Many freelancers use all their cash flow from their income to try and generate more business, forgetting or neglecting to save,” said Mike Volkin, lead instructor for the Freelancer Masterclass. That’s understandable, considering freelancers are under pressure to find work, but it’s troubling when you consider that freelancers have more reasons to save than their W-2 counterparts—paying for taxes and building a safety net chief among them.
A 2019 study by the Transamerica Center for Retirement Studies found that the average American has put away $63,000 in retirement accounts by their 40s, and around 15,000 in their 20s. We have a hunch these numbers are much lower for freelancers, who are often preoccupied with short-term financial goals. But contrary to popular belief, freelancers can easily save for the long term and spare themselves from financial uncertainty during their sunset years, just like full-time folks.
If you’re behind, don’t worry. We’ll show you how to build your nest egg the smart way.
Yes, You Need to Save for Retirement Too
Because of the financial uncertainties of freelance life, you’re sometimes tricked into thinking short-term—which can keep you from setting retirement goals. In other cases, freelancers simply don’t know what type of retirement savings plans are available to them.
Yet, retirement remains a desirable state for most. You don’t want to be working well into your 70s and 80s, do you?
Long-term saving IS important. If you’re a 1099-contractor, your money is not taxed before it lands in your checking account. Because of this, you need to set aside money for tax time, but you should also consider investing in some tax-advantaged accounts that could lower your total tax bill (by reducing your adjusted gross income and marginal tax rate) while helping you build a nest egg.
In fact, Riley Adams, licensed CPA and blogger at YoungandtheInvested.com, said, “Much like anyone else, freelancers should focus just as much on retirement one day. While their pathway might be less clear cut than a W-2 worker with ready access to a 401k or other employer-provided plan (should they be so lucky), freelancers still have the ability to set aside money in tax-advantaged ways.”
How Freelancers Can Save for Retirement
While you’re never going to get a hefty employer-matched retirement savings package as a freelancer, there are plenty of retirement accounts to consider that, with regular contributions, could unchain you from your laptop one day.
Here are options available to you as a self-employed individual:
Traditional or Roth IRAs
An Individual Retirement Account, or IRA, is a fairly easy way for freelancers to start saving for retirement because you can create an account even if you don’t have any employees.
There are two primary types of IRAs: traditional and Roth.
With a traditional IRA, you can deduct contributions from your taxes, but the money you draw come retirement is taxed as income.
Roth IRAs are the opposite: your contribution to it doesn’t afford you a tax deduction, but the money withdrawn from the account come retirement is tax-free.
Deciding between the two accounts often comes down to what’s more advantageous to you from a tax perspective, and whether you expect your taxable income to be higher or lower during retirement. If your freelance income is low right now and you expect it to grow over time, start with a Roth IRA. If your freelance income is high, opt for the traditional IRA. (Also, a Roth IRA has income limits for eligibility; those who earn too much can’t contribute. This is another reason to start with a Roth account.)
With both IRAs, you can contribute up to $6,000 in 2019, plus a $1,000 catch-up contribution (if you are age 50+).
Simplified Employee Pension Plan (SEP)
As a freelancer, another slightly more advanced type of retirement account is the Simplified Employee Pension, or SEP. This is a kind of retirement plan popular among small business, but can easily be used as a retirement savings account. (Many freelancers are structured as a business or LLC already.)
Here’s how it works: you (the employer) contributes each year to an IRA for employees (also you). So unlike a traditional or Roth IRA, a SEP contribution is made on behalf of a small business owner.
You can contribute to a SEP in addition to other retirement accounts, so it makes for a great building block for freelancer savings. The contribution limit is much higher than other retirement savings plans. You can contribute up to $56,000 in 2019.
Like other retirement savings plans, there are limits. Sole proprietors can contribute only up to 20% of their net self-employment income—up to $300,000 annually.
They also have tax-deferred growth potential until withdrawal (meaning you will be taxed when you draw the funds). Another benefit is that there are no mandatory contributions necessary.
Outsource financial help for retirement planning
If you’ve been freelancing long enough, you know tax prep is more complicated than it is for the average employee. If you’re confused, work with a tax and/or financial advisor to help navigate retirement savings and how that fits into your financial picture.
Full-time employees might be jealous of your solo status for many reasons, but retirement security likely isn’t one of them. Luckily, there are some financial vehicles available to prep for the end game.
Any time is a good time to start investing in your long-term financial security. If you’re committed to being your own boss indefinitely and feel that saving money to fund financial freedom as you grow older is important, now is the time to start.
[Download The Freelancer’s Guide to Financial Planning & Tax Strategy]
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Allie Gray Freeland is a senior-level freelance writer. She specializes in content strategy and copywriting for brands and has a passion for growing businesses through content! On the side, she’s a dog and kid mom.