Everything freelancers need to know about retirement

by Larissa Pham

Believe it or not, freelancers retire too! Time to start saving for your golden years. (Yes, it’s possible.)

Here’s a comprehensive look at the ins and outs of saving for retirement -- from the people who know freelancers best. Freelancers Union is the nation’s largest non-profit representing the independent workforce.

We’ve been advocating for freelance workers for nineteen years and helping freelancers get benefits for over ten of them. We also offer the nation’s only 401(k) specifically for freelancers.

Retirement is so far away! Why do I need to think about it now?

It’s never too early to start! Whether you begin big or small, saving prepares you for a secure future.

Unfortunately, many freelancers don’t save for retirement, thinking it’s too complicated or that 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!

What are the options?

Self-employed people have a lot of options when it comes to retirement. Here are the main types of plans you’ll encounter as an independent worker:

  • SEP IRA
  • Simple IRA
  • Individual 401(k)
  • Keogh

Essentially, what happens when you save for retirement is that you set aside money before taxes, and it’s put into an account you don’t access until -- you guessed it -- you retire. Then, when you take it out, it does get taxed. But in the meantime, you’ll save on taxes, and your money in the plan will also accumulate value, depending on how you choose to invest it.

The different kinds of retirement plans will differ by how much you can contribute, what kind of contribution it requires, and whether you can take a loan from yourself or not. Also, some plans will have more paperwork than others, and might even require hiring an accountant.

What do the different plans do?

SEP IRA –

  • Easy to set up.
  • You can contribute up to 25% of your income (with an annual 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) for an eligible reason.
  • 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 and you will likely need professional help, which is an additional expense to be aware of.
  • 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.

You can check 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.

I have to invest?

Yup! That’s how your money makes money. But all you have to worry about is how aggressive you want your investment to be. 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.

But I’m a freelancer, and my income is variable…

Well, we took the leap and made a retirement plan just for you. Freelancers Union’s retirement plan was built for freelancers, with no annual fee, no minimum, and easy ways to add lump sums during good periods (and no contributions during dry spells). It’s flexible and easy to use, and it doesn’t cost anything to set up!

How much should I save?

Experts generally recommend that you save about 10% of your income. But even if you can’t always manage that -- like if your income is episodic or variable -- it’s good to remember that it’s always better to save sooner than later! And if you want a number, try out this handy retirement calculator.

What else do I need to know?

It’s always good to do some research when you’re looking into retirement plans. Some things to keep in mind when you’re comparing your options are:

  • 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?

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, so do a little background research. And remember: when you’re ready to get started, Freelancers Union does offer a pretty great 401(k) for independent workers!

So freelancers, start saving and get yourself secured for those golden years!

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