Retirement Planning: A Freelancers Guide

Freelancing offers freedom and flexibility, allowing folks to craft their careers as they desire. Fiverr, a top freelance marketplace, forecasted in 2022 that 78% of companies would depend on freelancers rather than hiring staff by 2023.¹ The trend towards freelancing has undoubtedly surged since 2020, with many companies and employees embracing remote work capabilities.

While it does offer more flexibility, freelancing also comes with other considerations. One challenge freelancers face is retirement planning. Unlike traditional employees who have access to employer-sponsored plans, freelancers must proactively build their retirement savings.

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, growing tax deferred until withdrawal during retirement.

With a Roth IRA, after-tax contributions grow tax-free, and withdrawals in retirement are tax-free.

Solo 401(k)
The solo 401(k) is designed for self-employed people and allows for 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

In 2024, the annual contribution limit for a solo 401(k) plan is $23,000 + $7,500 if the participant is over 50 years old.²

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.³

With a SEP, you can contribute as much as 25% of your net earnings from self-employment (not including contributions for yourself), up to $69,000 annually.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) will have an HSA contribution limit of $4,150. The HSA contribution limit for family coverage will be $8,300. 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.
Treat retirement savings as a priority expense. Set up automatic transfers from your business account to your retirement account to make it easier.
Create a budget that includes retirement savings. Calculate a 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 selecting the right retirement accounts and learning about their options, freelancers can confidently manage the complexities of retirement planning. Investing in your financial future now will help create a financial foundation that supports your retirement dreams.

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Information presented on this site is for informational purposes only and does not intend to make an offer or solicitation for the sale or purchase of any product or security. This content is developed from sources believed to be providing accurate information, and provided by Joey Cappuccino and Twenty Over Ten. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation.