Saving for Retirement: Tips for Freelancers

If you’re a freelancer, the topic of saving money for retirement has probably crossed your mind at some point. Planning for retirement is crucial for a peaceful and secure future, so it’s best to start sooner rather than later.

As a freelancer, your income can be variable and sometimes unstable, so it’s important to choose a retirement plan that fits 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 expenses.

Know Your Spending Habits

Take a close look at where you’re spending your money and how it aligns with your values. Is dining out more important than saving for retirement? Do you have a weakness for new clothes you can’t really afford? Do you frequently splurge at high-end grocery stores?

Set Up Automatic Savings

The goal with budgeting is to reach 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 have a good plan and you’re not living paycheck to paycheck, set a reasonable goal for how much you can put aside for retirement each month. Alternatively, you can choose a percentage of each payment to save.

Here are some of the most popular retirement savings options for freelancers: a Traditional or Roth IRA, a Solo 401(k), a SEP IRA, a SIMPLE IRA, or a Defined Benefit Plan.

Traditional or Roth IRA

An IRA is 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. The two basic types of IRAs are Traditional and Roth IRAs.

The main difference is when you pay income tax on the money you contribute. With a Traditional IRA, you pay taxes when you withdraw the money in retirement. With a Roth IRA, you pay taxes upfront and have no taxes when you withdraw the money.

The 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 or older). You can open an IRA at an online brokerage in just a few minutes.

Solo 401(k)

This retirement plan has recently become available and is a good option for maximizing retirement savings, regardless of your monthly income. Its main advantage over a Traditional IRA is the higher limit, allowing you to save more.

With a Solo 401(k), you have two roles: employee and employer. As an employee, you can 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.

SEP-IRA

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 and are generally designed to replace a certain percentage 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. Net self-employment income is net profit less half of your self-employment taxes paid and your SEP contribution.

SIMPLE IRA

The SIMPLE IRA plan allows for tax-deferred and pretax contributions, along with employee and employer match contributions. It’s suitable for self-employed professionals and small businesses with fewer than 100 employees.

Defined Benefit Plans

Defined benefit plans are qualified employer-sponsored retirement plans. They offer tax incentives to both employers and participating employees. This plan is usually best for a self-employed person with no employees who has 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 returns.

Final Thoughts

Saving for retirement can be challenging, especially when you have competing financial goals. However, there are numerous resources that offer useful retirement financial tips and steps to get started.

Any of the five options above could be great for you as a freelancer, but these aren’t one-size-fits-all solutions. Once you decide which retirement plan to open, you’ll need to choose where to do it. Most online brokers allow you to open the four most common account types: IRA, Solo 401(k), SEP IRA, and SIMPLE IRA.

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