Best Retirement Plan Options for Freelancers

There are plenty of perks that come with being your own boss: flexible hours, picking your projects and more control over work-life balance. But one thing you’ll miss out on is an employer retirement benefit.

When you freelance, building your own retirement nest egg, including choosing the right plan, falls entirely on your shoulders. You can set up a retirement account at an online brokerage or robo-advisor. But first, you should know the best options for you.

Freelancer Retirement Options

Traditional or Roth IRAs

freelancer retirement options


An individual retirement account (IRA) is an excellent way to build savings while also getting tax advantages. You can contribute up to $5,500 annually, or $6,500 a year if you are 50 or older. You must designate which kind of IRA you want upon opening the account: traditional or Roth. Taxes are the main difference between the two IRAs.

  • Traditional IRA: The amount you contribute won’t be taxed until you withdraw the money. The same goes for any earnings you gain from investments in this kind of IRA. In general, if you withdraw money before 59½ years old, you’ll incur a 10% penalty and the amount will be included as taxable income. You are required to withdraw a minimum amount from your account each year when you reach age 70½. If you are married and your spouse is covered by a retirement plan at work, your ability to deduct traditional IRA contributions from your taxes will start to phase out at higher income levels, as set by the IRS
  • Roth IRA: Roth IRAs come with income limits — if you earn too much, you’re not eligible. You can’t get a tax deduction for contributions to a Roth IRA, but qualified distributions are tax-free in retirement. You won’t incur a penalty at any time for withdrawing contributions (it’s different for earnings — you must be at least 59½ and your initial contribution must be at least five years old). You can make contributions after you are 70½ and leave money in your account for your lifetime.

Choosing a Roth or traditional IRA also depends on where you fall in the tax bracket and where you believe your tax bracket will be in retirement. If you’re in a low tax bracket now but expect to be in a higher one in retirement, a Roth IRA could be a better choice since withdrawals in retirement aren’t taxable income. If you’re currently in a high tax bracket or close to retirement, a traditional IRA will likely be a better option, since your taxes should be lower when you’re making withdrawals. 

Simplified Employee Pension (SEP) IRA

A SEP allows flexible annual contributions, which is best for freelancers who may not have a reliable income. With a SEP, you can contribute up to 25% of your compensation, up to $53,000. SEP plans don’t allow for catch-up contributions.

Related: 7 Money-Saving Tips for Freelancers

Your contributions and investment income are tax-deferred, as are the earnings from the investments. This plan is available to any size business, including an individual freelancer. A SEP is easier to set up than most plans, and you can get started using the 5305-SEP form from the IRS. Withdrawals before age 59½ are considered taxable income and are subject to a 10% penalty. Any withdrawals after 59½ are subject to ordinary tax rates. 

Solo 401(k)

freelancer retirement options


A Solo 401(k), also known as a One-Participant 401(k), is designed for people who are self-employed and for small businesses. Contributions to these plans aren’t reported as taxable income and aren’t subject to federal income tax withholding.

To qualify, you can’t have a full-time employee under you and you can only cover yourself and, if applicable, your spouse. Unlike typical employer-sponsored 401(k) accounts, you are the account owner so you have more control in directing investments.

You can also contribute a higher amount from your income than with many other retirement accounts — up to $18,000 each year. Those 50 or older can tack on an additional $6,000 to the total as a catch-up contribution. Typical employer-sponsored 401(k)s often come with an employer match benefit. Since you’re your own employer, you can contribute up to 25% of total compensation. This can help you grow the account even faster, up to $53,000, or $59,000 with the catch-up contribution, for 2016.

Contributions and investment income are tax-deferred, as are the earnings. After you reach 59½, any withdrawals will be taxed at ordinary rates. Before 59½, your withdrawals may incur a 10% penalty as well as income taxes.

How much you should save

The amount you contribute should be in line with how much money you need to retire.

If you’re on a budget and haven’t been saving for retirement, you can always start small and grow as you go. But remember: because of the magic of compound interest, the earlier you start saving, the less you’ll have to save in the long run.

Anna Helhoski is a staff writer at NerdWallet, a personal finance website. Email: Twitter: @AnnaHelhoski.






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