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Retirement for Freelancers

9 min read

30 sec brief

If you freelance, you know the freedom the lifestyle brings. However, that independence brings a great deal of responsibility for things your employer used to handle, like saving for retirement.  There are several types of accounts such as IRAs, 401(k)s, and Health Savings Accounts (HSA) that freelancers can utilize to save for retirement, so you…

If you freelance, you know the freedom the lifestyle brings. However, that independence brings a great deal of responsibility for things your employer used to handle, like saving for retirement. 

There are several types of accounts such as IRAs, 401(k)s, and Health Savings Accounts (HSA) that freelancers can utilize to save for retirement, so you are ready to rock in those later years.

Individual Retirement Accounts (IRAs)

Individual Retirement Accounts (IRAs) allow you to set money aside for retirement. There are several types of IRAs available for freelancers to consider.

Traditional IRA

Traditional IRAs (Individual Retirement Accounts) offer a tax-advantaged way to save for retirement when you don’t have an employer-sponsored account. To note, it is called a “Traditional IRA” to set it apart from a Roth IRA.  

Income Limits

Anyone younger than 70 ½ with earned income can contribute to a Traditional IRA. Some contributions are tax-deductible, but it depends on your income and if you or your spouse are covered by a retirement plan through a job.

Contribution Limits

For 2019, the annual contribution limit for Traditional IRAs is $6,000, up from $5,500. The catch-up limit for people over 50 remains at $1,000. Remember, you can make a 2018 IRA contribution until April 15, 2019.

Tax Incentives

Contributions made to Traditional IRAs are tax-deductible on state and federal tax returns the year you make the contribution. The money will be taxed at regular income tax rates when you make withdrawals during retirement. With Traditional IRAs, you avoid taxes when you put the money in.

Withdrawal Rules

Traditional IRAs let you take penalty-free, “qualified” distributions at age 59 ½. At age 70 ½, you must begin taking required minimum distributions (RMDs), required withdrawals of a certain percentage of your account, regardless of if you need the money or not.

Roth IRA

Roth IRAs are funded with post-tax income. You contribute money to these accounts after tax has been taken out. When you withdraw your money, you won’t owe tax on it.

Income Limits

There are no age restrictions on Roth IRAs, but they do have income-eligibility requirements. For example, in 2019, a single tax filer modified adjusted gross income (MAGI) must be less than $137,000 (contribution limits are phased out starting with a modified adjusted gross income of $122,000). Married couples who file jointly must have a modified adjusted gross income of less than $203,000 (with contribution limits phased out at $193,000). The IRS has all the details to help you figure out what your personal limits are.

Contribution Limits

Roth IRA’s contribution limits are $6,000. People over 50 can make an additional $1,000 contribution (catch-up contribution amount hasn’t changed) for a total of $7,000.

Tax Incentives

Roth IRAs don’t provide a tax break when you make contributions; however, the earnings and withdrawals are tax-free. Because IRA contributions are made after taxes are taken out, it’s a great way to take advantage of the time value and tax-free growth of your money, especially if you’re in a low tax bracket now.

Withdrawal Rules

Roth IRAs allow you to begin taking penalty-free, “qualified” distributions at age 59 ½. To note, Roth IRAs require that the first contribution is made at least five years before the first withdrawal. When you meet that requirement (it only has to be met once), you will have paid tax on the money that went into the account, not the amount you can eventually withdraw.

Here’s a neat advantage of Roth IRAs, they don’t require the owner to make any withdrawals during their lifetime. If you have the income to fund your retirement from other sources, your Roth IRA can become a great wealth-transfer vehicle. Roth IRA beneficiaries won’t owe income tax on withdrawals, but may still owe estate taxes.

SEP IRA

A Simplified employee pension individual retirement arrangement – otherwise known as a SEP IRA – are simple accounts to set up and maintain with minimal paperwork and requirements. Businesses of any size, including those who are self-employed, can participate in SEP IRAs.

Income Limits

Your SEP IRA contribution limit depends on your actual income and could be higher than other IRA limits ($6,000 or $7,000 if you’re over 50 in 2019). To figure out how much you can contribute requires a special formula that includes determining your gross income, subtracting your business expenses (including your SEP IRA contributions) and then subtracting half of your self-employment tax. Because this calculation is very complicated, you’ll want to speak with a professional to ensure you know how much you can contribute from the beginning.

Contribution Limits

Your annual SEP IRA contributions cannot be more than 25% of your net earnings up to $56, 000 in 2019. There are no catch-up allowances for SEP IRAs, and they can be combined with Traditional or Roth IRAs.

Tax Incentives

SEP IRA contributions are tax-deductible and the money invested grows until retirement when the withdrawals are taxed as income.

Withdrawal Rules

You can withdraw your SEP IRA funds anytime, however, if you take money out before the age of 59 ½, you may be subjected to a 10% tax penalty in addition to the income tax penalty. However, there are situations where the penalty may be waived.

401(k) Options

Freelancers also have a 401(k) option to save for retirement.

Solo 401K

The Solo 401(k), also known as a one-participant 401(k) is designed for self-employed workers that is like a regular employer-sponsored plan, just without the employer.  An individual 401(k) is for a business owner with no employees, though you can cover yourself and your spouse under the plan.

Income Limits

There are no age or income restrictions, but you must own a business and have no employees.

Contribution Limits

In 2019, the solo 401(k) contribution limit for a self-employed person is $19,000. The rules for calculating your individual limits are quite involved, and the IRS has an excellent guide to help you figure out your personal amounts. 

To note, if you’re side-gigging as a freelancer, 401(k) limits apply by a person, rather than by plan. So if you’re participating in a 401(k) at your day job, the contribution limit applies to all of your 401(k) plans, not each one separately.

Tax Benefits

401(k) plans allow you to choose your tax advantage. You can opt for the traditional 401(k), where contributions reduce your income the year you make them, and the distributions are taxed as income.

Alternatively, you can choose the Roth solo 401(k). This type offers no initial tax break and the distributions you take at retirement are tax-free. The Roth option allows your money to grow over many years and you don’t have to take tax out at the end. However, if you feel your retirement income will decrease, consider opting for the tax break now with the traditional 401(k) option.

Withdrawal Rules

For the most part, if you take money out before age 59 ½, you’ll have to pay taxes and penalties on a 401(k).

Health Savings Account Option

Another option you have as a freelancer is to use a Health Savings Account for retirement savings. Because many freelancers are enrolled in High Deductible Health Plans, pairing an HDHP with an HSA can easily transition into saving for retirement. 

A big reason an HSA is great for retirement savings is that you’re not required to use the money the year you contribute it.  If you can cover your current healthcare out-of-pocket expenses with other funds,  you can leave your HSA money untouched, and use it for retirement down the road. You get the initial tax deduction on the money you contribute to your HSA, and the balance grows without incurring tax as the years go by.

As a freelancer, it’s essential to take charge of your retirement today so you can enjoy those years when they arrive. Knowing there are several options to build your nest egg should help ease some of the worries you may have.


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Disclaimer: the content presented in this article are for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, including fund prospectuses, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.

About the author

Vicky Warren

Vicky Warren, once a nurse, now a freelance healthcare writer and social media coach.

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