If you are a freelancer, the topic of saving money for retirement has probably crossed your mind at some point. Planning your retirement is crucial for a peaceful and secure life down the road, so it is best to start planning sooner than later.
As a freelancer your 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.
So where do you start?
Saving Money for Retirement as a Freelancer
Track Your Spending
Before you can save you need to understand where your money is going. Set up a system to start tracking your money.
Know Your Spending Habits
Really take a look at where you’re putting your money and how it aligns with your values. Is eating out at restaurants more important than your retirement? Do you have a weakness for new clothes you can’t really afford? Do you shell out 80 bucks every time you step foot into a Whole Foods?
Set-Up Automatic Savings
The goal with budgeting is to get to a point where you’re spending money that’s been in your account for 30 days or longer. When you’re not spending money as soon as it comes in, you have much more control over your financial life. This is especially useful for freelancers with variable incomes.
Once you’ve got a good plan going and you’re not stuck living paycheck-to-paycheck, come up with a reasonable goal of how much you can put aside for retirement each month. If it works better for you, you can also choose a percentage of each payment that you’ll put aside.
Below are some of the most popular ways of saving money for retirement for freelancers: an IRA (traditional or Roth), a Solo 401(k), a SEP IRA, a SIMPLE IRA or a defined benefit plan.
Traditional or Roth IRA
An IRA is perhaps one of the easiest ways for self-employed people to start saving for retirement. There are no special filing requirements, and you can use it whether or not you have employees. There are two basic types of IRAs: traditional IRAs and Roth IRAs.
What differentiates the two 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.
IRA contribution limit is $6,000 in 2022 ($7,000 if age 50 or older) and $6,500 in 2023 ($7,500 if age 50 and older).
You can open an IRA at an online brokerage in a few minutes.
The Solo 401(k)
This retirement plan has recently become available and is a good option for maximizing retirement savings no matter what amount 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 a tax-deductible or Roth IRA contribution, up to $61,000 in 2022, plus a $6,500 catch-up contribution or 100% of earned income, whichever is less. In 2023, that number rises to $66,000.
A SEP-IRA (Simplified Employee Pension) is an easy-to-administer retirement plan for anyone who is self-employed, owns a business, employs others, or earns freelance income. Defined benefit plans can be a major source of retirement income. They’re generally designed to replace a certain percentage (e.g., 70 percent) of your preretirement income when combined with Social Security.
With a SEP IRA, you can contribute $61,000 in 2022 or up to 25% of compensation or net self-employment earnings. Again, net self-employment income is net profit less half of your self-employment taxes paid and your SEP contribution.
The simple IRA 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.
Defined Benefit Plans
Defined benefit plans are qualified employer-sponsored retirement plans. This retirement plan offers tax incentives both to employers and to participating employees.
This plan is usually best for a self-employed person with no employees who have a high income and wants to save a lot for retirement on an ongoing basis.
The contribution limit is calculated based on the benefit you’ll receive at retirement, your age, and your expected investment.
Saving money for retirement can be challenging, especially when you have competing goals. But there are numerous resources that offer useful retirement financial tips and steps to get started.
Any of the five options above could be a great option for you as a freelancer, but these aren’t one-size-fits-all solutions. Once you’ve decided to open one of the five types of retirement plans above, you’ll have to decide where to do it.