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How to plan for retirement on a freelance income (5 options)

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Updated on:
December 11, 2022
December 11, 2022
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If you’ve been freelancing for a longer amount of time, the topic of a retirement plan has probably crossed your mind at some point, between sending scope of work templates and drafting agreement templates. Knowing that planning your retirement is crucial for a peaceful and secure life down the road, it’s best to choose a plan of action sooner rather than later.

As a freelance marketing automation geek, I know how income can vary and be unstable at times, it’s important to choose a retirement plan which can fit the needs of your monthly income. Budgeting should become daily part of your life, and enable you to normally function, while leaving room for saving.

The one true thing no matter your plan of choice: you need to be disciplined and stay on track, just as you do with your freelance health insurance.

As of 2017, a little over a third of the US workforce is freelancing. A third of the US workforce also has no retirement savings. Hopefully these two facts are not completely correlated, though there is bound to be some overlap.

Here are some of the most popular retirement plan options for freelancers, to ensure you’re on the right side of the statistics and your future:

1. The solo 401(k)

A variation of the traditional 401(k) form, the solo 401(k) is well-suited for self-employed professionals. This retirement vehicle has recently become available and is a good option of maximizing retirement savings no matter the varying amounts you’re pulling in monthly. Its main advantage over a traditional IRA is the higher limit, allowing you to save more.

With the solo 401(k) you will have two roles: of employee and of employer.

The role of the employee offers you the opportunity to choose tax-deductible or Roth IRA contribution, up to $18,000 in 2017. After the age of 50, you can also add additional “catch-up” contributions, up to $24,000 in total.

The role of the employer allows you to contribute a maximum of 25% of your earnings- after the deduction of your self-employment tax and contributions you make as an employee.

This plan allows for $55,000 to be saved in 2018, making it a great option for self-employed people.

In the beginning, things are quite straight-forward, but once your assets hit the $250,000 mark- you will be required to file Form 5500 with the IRS. Though this process can be a little complicated, don’t let it discourage you from setting up a 401 (k), it’s been the number one choice for employees for a reason.

2. Traditional or Roth IRA

IRAs or Individual Retirement Arrangements are retirement plans you can have even if you’re already participating in a different retirement plan. There are two basic types of IRAs: traditional IRAs and Roth IRAs.

The thing differentiating them is the timing of paying income tax on the money you contribute. If you opt for a traditional IRA, you will pay taxes when you withdraw the money in retirement. If you go with a Roth IRA, the opposite is true: you will pay taxes on the front end, and have no taxes when you’re withdrawing money.

Another difference is the legibility: while anyone with earned income can contribute to a traditional IRA, there are income limits connected to Roth IRAs.

The main drawback of IRAs is the existing contribution limit, set at $5,500 in 2018, or $6,500 if you’re over 50 years of age. Still, they’re a good side-way of setting up some retirement funds, and are perfectly suited for low-income individuals.

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The main appeal of an IRA are the offered tax benefits, such as tax deferred interest compounding.

The SEP IRA falls under traditional IRAs, and a great improvement it has over other traditional types is the higher contribution limit it allows. While in an IRA you’re allowed to contribute $5,500 per year, or $6,500 if you’re older than 50, the SEP IRA allows you to contribute $55,000 in 2018 or 25% of your compensation- whichever is lower.

A SEP IRA is also a good idea if you have employees, with the rule that you ought to contribute the same percentage to their accounts as you do your own. In this type of account, only the employer is allowed to make contributions, which can be seen as a drawback of sorts, as it doesn’t give the employee as much control over their savings as some other plans do.

It’s pretty easy to operate, with typically no tax forms. The cost of operation is also very low, so it’s my definite recommendation, if you’re pulling in greater earnings.

4. Personal savings account

The goal of a personal savings account is to allow you to safely store your money away, while the bank pays a small interest fee to you, for having the opportunity to take advantage of your money while you’re not using it.

The interest can vary according to the type of account you have. Generally, online savings accounts have a slightly higher fee than regular ones. There are also money market accounts, which do have a higher minimum deposit, but which offer higher interest the larger your assets are.

These specifics vary bank to bank, but I suggest visiting your local branches and getting information on which plans they offer and under which conditions.

My general recommendation for freelancers is setting up a money market account if you opt for this type of retirement saving, as it allows for a higher interest accumulation, while mainlining the flexibility of a savings account.

The benefit of a savings account is being able to deposit and withdraw money as needed, which brings me to my next point:

Even if you have a personal savings account and a separate account for taxes, it’s always good to have some money set aside for emergencies. This will ensure that you won’t borrow money for your future to deal with the problems of your present.

It would be best to make a fund large enough to support six or more months of your lifestyle, just in case something doesn’t go according to plan. Splitting your money into different accounts may seem overzealous, but it’s a foolproof way of supporting your long-term goals.

5. Simple IRA

Similar to the 401 (k), the simple IRA plan or the Savings Incentive Match Plan for Employees allows for tax-deferred and pretax contributions, along with employee and employer match contributions.

It’s suitable not only for self-employed professionals, but also for small businesses with less than 100 employees.

The intricacies of the plan are the following:

You’re allowed to contribute a maximum of 100% of your compensation as an employee, up to $12,500 in 2018. There is also a possibility of catch-up contributions for employees over 50 years of age, with the limit of $3,000 in 2018.

The employer can choose to either contribute a 3% matching contribution to the employee’s or to put in a 2% non-elective contribution. This means that they would contribute 2% of the employee’s salary.

The simple IRA doesn’t have big start-up or operating costs, and it’s pretty simple to operate. This, along with the fact that it allows employees a great amount of control over their own retirement savings, makes it particularly popular in small businesses.

Final thoughts

Personal finance is a complex topics, and the rules vary for different individuals depending on their goals, yet one of the tips everyone can agree on is the need to save for retirement. Challenging as it can be, it is a necessity for a secure future.

This overview of the 5 popular retirement plan options had the aim of providing you with the possibilities you have when approaching this daunting topic. For more information, I suggest reading on different retirement solutions directly from the IRS resource center, as they provide a pretty neat overview of all options.

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