Freelancer's Guide To Retirement Investing: Strategies For A Secure Future

As a freelancer, you are responsible for planning your own retirement. You don't have the benefit of an employer-provided retirement account, so you have to set up a financial system that will support you in the long term. Luckily, there are several retirement plans for those who are self-employed.

There are four available plans tailored for the self-employed: one-participant 401(k), SEP IRA, SIMPLE IRA, and Keogh plan. Health savings plans (HSAs) and traditional and Roth IRAs are supplemental options.

Solo 401(k)s

A solo 401(k) is a retirement plan for self-employed workers or small-business owners with no employees (other than a spouse). It is designed to mimic an employer-sponsored plan, allowing you to contribute to your retirement in two ways: as an employee and as an employer.

As an employee, you can contribute up to $23,000 in 2024, or 100% of your compensation, whichever is less. If you are 50 or older, you can contribute an additional $7,500. As the employer, you can make a profit-sharing contribution of up to 25% of your compensation or net self-employment income (your net profit less half of your self-employment tax and the plan contributions you made for yourself). The total contribution limit for 2024 is $69,000, or $76,500 if you are including catch-up contributions for those aged 50 or older.

The solo 401(k) offers flexibility in terms of tax advantages. You can opt for the traditional 401(k), where contributions are made pre-tax, reducing your taxable income for the year. Alternatively, you can choose the Roth solo 401(k), where contributions are made with after-tax dollars, and distributions in retirement are tax-free.

SEP IRAs

A Simplified Employee Pension (SEP) IRA is a traditional IRA for self-employed people and small-business owners. It allows employers to contribute to IRAs set up for employees, and they can also contribute to their own retirement savings. A business of any size, even self-employed, can establish a SEP.

The employer must contribute equally for all eligible employees, and only the employer contributes. Employees are 100% vested in or own all SEP-IRA money. Contributions are made to a traditional IRA or Annuity (SEP-IRA) set up for each plan participant.

Who is eligible?

Eligible employees must have worked for the employer for at least three of the last five years and received a minimum compensation of $750 in 2024. The employer can use less restrictive requirements, but not more. The employer can exclude employees covered by a union agreement and non-resident aliens with no US wages or compensation.

Contribution limits

The contribution limit for 2024 is $69,000, or 25% of compensation, whichever is less. The amount of compensation used to calculate the 25% limit is limited to $345,000 in 2024.

Deadlines and withdrawals

The deadline to set up and fund the account is the federal income tax filing deadline. Contributions must be made by the due date for filing the federal income tax return for the year, including extensions. Withdrawals are subject to a 10% penalty if made before the age of 59 1/2.

Pros and cons

The SEP IRA has a high contribution limit and is easy to set up and administer. It can be combined with a traditional IRA or a Roth IRA. Contributions are tax-deductible, and there is flexibility as you don't have to commit to contributing every year. However, there is no catch-up contribution for savers over 50, and there is no Roth version. There are required proportional contributions for each eligible employee, and minimum distributions are required from the age of 73. Withdrawals before the age of 59 1/2 are taxed as income and subject to a 10% penalty.

SIMPLE IRAs

A SIMPLE IRA is a retirement savings plan that most small businesses with 100 or fewer employees can use. "SIMPLE" stands for "Savings Incentive Match Plan for Employees", while IRA is the acronym for "individual retirement account".

Both employees and employers can contribute to this plan. However, employers are required to contribute either a matching contribution of up to 3% of compensation (matching means the employee must contribute to receive it) or 2% of all eligible employees' compensation, regardless of whether they contribute.

Employees can contribute up to 100% of their compensation, to a maximum of $15,500 in 2023, or $19,000 if they are 50 or older. In 2024, the maximum contribution limit was raised to $16,000.

Health Savings Accounts (HSAs)

• Contributions to an HSA are tax-deductible, and withdrawals for qualified medical expenses are tax-free.
• HSA contributions carry over from year to year and are not subject to a "use-it-or-lose-it" rule, unlike Flexible Spending Accounts (FSAs).
• While the primary purpose of an HSA is to fund healthcare costs, it can also be used to cover other expenses in retirement, such as housing, daily living, debt repayment, or higher education expenses.
• HSA funds can be used to pay for a variety of qualified medical expenses, including office visit copayments, health insurance deductibles, vision and prescription costs, and long-term care services.
• Individuals aged 55 or older can make an additional "catch-up" contribution of $1,000 per year to their HSA.
• HSA funds can be invested in mutual funds or similar investment vehicles, similar to a 401(k) or IRA.
• After age 65, HSA funds can be withdrawn for any purpose without penalty, although non-medical withdrawals will be taxed as ordinary income.
• HSAs are "portable" and remain with you if you change employers or leave the workforce.
• To be eligible for an HSA, you must be covered under an HDHP, have no other health coverage (except in certain specified cases), not be enrolled in Medicare, and not be claimed as a dependent on someone else's tax return.

Roth IRAs

A Roth IRA is an individual retirement account that allows individuals with earned income to save for retirement. Contributions to a Roth IRA are made with money on which you have already paid taxes. This means that, while you don't get a tax break on contributions now, you also won't pay taxes on withdrawals in retirement.

Anyone with earned income can open a Roth IRA, including freelancers. As a freelancer, you can contribute up to $6,000 to a Roth IRA in 2023 ($6,500 if you're over 50), or $7,000 in 2024 ($8,000 if you're over 50).

A Roth IRA is a good option for freelancers because it offers flexibility—you can withdraw your contributions at any time, at any age, without penalty. Additionally, if you're saving for a first house, you can withdraw money from your Roth IRA without incurring tax penalties.

The main downside of a Roth IRA is that contributions are limited to $6,000 or $7,000 per year, depending on your age. If you're looking to save more for retirement, you may want to consider other options, such as a SEP IRA or solo 401(k).

You can open a Roth IRA at most brokerages, including Vanguard, Fidelity, Charles Schwab, T. Rowe Price, Betterment, and Wealthfront, as well as many credit unions. The process is usually straightforward and can often be completed online in under 10 minutes.

If you're a freelancer, it's important to prioritize saving for retirement, even without the structure of an employer-sponsored plan. A Roth IRA can be a great option, but be sure to do your research and consider other retirement savings options as well to ensure you're making the best choices for your financial future.

Frequently asked questions