Retirement for freelancers: What you need to know to get started
You’re your own boss, which means you need to get your #1 employee set up for retirement.
Unfortunately, many freelancers don’t save. They assume it’s too complicated or they think they don’t have enough money to put aside. But if you’re interested in making the most of what you earn, a retirement plan is a much smarter way to plan ahead than saving money in the bank -- and you even save on your taxes (which I know all freelancers need!).
Here’s some basic information to help get you started on the path to your golden years.
What kind of plan is best?
There are a couple of retirement plan options for self-employed people. It’s best to do your own research since the best plan for you depends on your income and flexibility.
Here are some key things to watch for when you compare plans:
- What are the plan’s administrative fees and expenses?
- What tax benefits will I get?
- What is the cap on how much I can contribute per year?
- Will I have to do a lot of administrative work? (Paperwork, hiring actuaries, etc.)
- Will I be required to make a yearly contribution, or can I contribute whenever?
- Can I borrow money from my plan?
SEP IRA –
- Easy to set up.
- You can contribute up to 25% of your income (with a maximum of $52,000.)
- You can’t take loans from a SEP IRA.
Simple IRA –
- Easy to set up.
- Not a good option if you want to save a lot, as the annual contribution limit is $12,000.
- You can’t take loans from a Simple IRA.
Individual 401(k) –
- Depending on your income, it may allow for higher contributions than a SEP or Simple IRA; you can contribute up to $17,500 plus 20% of your net self-employment income (for a maximum of up to $51,000).
- May involve more administrative responsibilities if you set it up yourself. For an easier option, check out Freelancers Union’s 401(k) on our National Benefits Platform.
- Flexible; you will likely be able to take out a loan from your 401(k).
- You may have the option of a Roth 401(k), which means you can pay taxes at deposit instead of at withdrawal.
Keogh –
- Requires much more paperwork, you will likely need professional help.
- Only applicable to self-employed individuals who own an unincorporated business.
- If you are a very high income freelancer, it may be worthwhile as it allows for greater annual contributions than other types of retirement plans.
Visit IRS.gov for the most current contribution limits and regulations. If you are over 50, you may be able to make larger contributions to “catch-up” for retirement.
There may be tax implications or advantages depending on if you are a sole proprietor, LLC, C-corp, S-corp, or if you pay yourself as a W2 employee. To choose the best plan for yourself, make sure you do your homework. Talk to an accountant. Read some books. Peruse financial websites.
Investment 101
Small cap. Large cap. Fixed-income funds. REITs. Um… What??
It’s confusing, I know. What you need to know about investing your funds is that it’s all about risk. Some funds have a higher risk, and the potential to yield higher rates of return. Other funds are safer.
After you set up your retirement account and start contributing, you’ll be asked about which funds you want to invest in. Normally the person helping you set up your plan will help guide you to choosing an appropriate level of risk. Generally speaking, the closer you are to retirement, the less risky you want your funds to be.
For more complete guides to investments and choosing a retirement plan, check out:
How much should I save?
This part is fun – because you can use online calculators! – and terrifying, because we should probably all be saving more. Here’s a handy retirement calculator to try.
If you can’t manage a big chunk of change each month because you have episodic income, you should look for a flexible retirement option that allows you to make deposits when you’re able (or automatically contribute an amount every month).
Investment experts recommend putting aside 10% of your pay for retirement. However, remember that it’s always better to start saving tiny amounts now than to wait until you “have money” to open a retirement plan.
Find a savings strategy that’s simple
Confused yet? There’s a lot to take in, but don’t be intimidated. As long as you set up a plan and regularly make contributions, you’ll be much better off when it comes time for your retirement.
To make the process a little easier, we created Freelancers Union Retirement Plan, a 401(k) plan with easy investment options and no administrative fees. To check it out and see other specially-curated benefits for freelancers, visit our National Benefits Platform.