What are the Retirement Plan Options for Freelancers?

Freelancing offers unparalleled freedom and flexibility, allowing individuals to craft their careers on their terms. In 2022, Fiverr, a leading freelance marketplace, predicted that 78% of companies would rely on freelancing rather than hire staff in 2023.¹ Freelancing has undoubtedly increased since 2020, when many companies and employees learned that much work can be done remotely.

While it does offer more flexibility, freelancing also comes with considerations. One obstacle for freelancers is retirement planning. Unlike traditional employees with access to employer-sponsored plans, freelancers must proactively build their retirement nest eggs.

Let's explore retirement planning for freelancers and provide some practical steps and strategies to help them plan for secure financial futures.

Retirement Planning Challenges for Freelancers

Freelancers face unique retirement planning concerns for a few reasons.

First, freelancers often experience fluctuating income, making it challenging to set aside consistent savings for retirement.

Also, many freelancers need access to 401(k)s or pensions, requiring them to navigate individual retirement options. Unlike employees who benefit from employer-matched contributions, freelancers are solely responsible for funding their retirements.

Retirement Planning Options for Freelancers

Despite these challenges, freelancers have several practical tools and strategies. Here are a few options:

Individual Retirement Accounts (IRAs)
Freelancers can save for retirement using traditional or Roth IRAs. With a traditional IRA, contributions are tax-deductible (if neither you or your spouse are covered by a retirement plan at work) and grow tax deferred until withdrawal during retirement. With a Roth IRA, after-tax contributions grow tax-free, and withdrawals in retirement are tax-free. There are no income limits for traditional or Roth IRA contributions if neither you nor your spouse are covered by a retirement plan at work.

SEP-IRA (Simplified Employee Pension)
A SEP-IRA offers a straightforward way for freelancers to save for retirement, allowing contributions as a percentage of income. A business of any size, even self-employed business owners, can establish a SEP. A SEP does not have the start-up and operating costs of a conventional retirement plan and allows for a contribution of up to 25% of each employee's pay up to a limit of $69,000 in 2024.³

Solo 401(k)
The solo 401(k) is designed for self-employed individuals, allowing employer and employee contributions with higher contribution limits than IRAs. According to the IRS, a one-participant 401(k) is “a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse.”²

A Solo 401(k) allows for elective deferrals up to 100% of compensation up to $23,000 (or $30,000 if over the age of 50) in addition to employer nonelective contributions up to 25% of compensation with a maximum of $69,000 in 2024.⁴

Health Savings Account (HSA)
While primarily for healthcare, an HSA can also serve as a retirement tool. Contributions are tax-deductible, and qualified withdrawals are tax-free, even in retirement.

If you set up an HSA and contribute to it as a sole proprietor, you can deduct some of your contributions on your personal income tax return. For 2024, individuals under a high-deductible health plan (HDHP) have an HSA contribution limit of $4,150. The HSA contribution limit for family coverage has an HSA contribution limit of $8,300. Those 55 and over can contribute an additional $1,000 as a catch-up contribution. These amounts are about 7% higher than in 2023.⁵

Tips for Saving for Retirement as a Freelancer

Setting aside funds for your retirement income can be difficult when working for yourself. Here are some tips to consider to help you prioritize retirement planning:

• Set clear goals, whether a specific age to retire or a desired retirement lifestyle. This clarity will guide your savings strategy.
• Pay yourself first. Treat retirement savings as a priority expense. Set up automatic transfers from your business account to your retirement account to make it easier.
• Budget wisely and create a budget that includes retirement savings. Calculate a baseline budget using your lowest-earning months, then allocate more to retirement savings during high-earning months.
• Diversify your investments to help mitigate risk.
• Educate yourself on your retirement options.
• Plan for healthcare expenses in retirement.
• Understand tax implications of retirement accounts and contributions. Consult a tax professional to optimize tax benefits.
• Regularly review and adjust your plan to stay on track.

By choosing the proper retirement accounts and educating themselves on their options, freelancers can confidently navigate the complexities of retirement planning. Your future self will thank you for your foresight and diligence in creating a financial foundation that supports your retirement dreams.