Retirement Plans to Consider for Freelancers

In America, over a third of the workforce is into some type of freelancing. According to the recent growth in freelancing, the majority of the workforce in America is expected to be freelancers by 2027. Although freelancing seems to have different perks, there are some downsides to it. According to a study by financial software developers for freelancers, around 40% of self-employed individuals save for retirement sporadically – a contrast to 12% of traditional workers. But what is the reason for freelancers being careless in saving for retirement?

A freelancer has some unique ways of saving for their retirement. In fact, some saving plans help them contribute more annually than they could as an IRA (Individual Retirement Account).

Retirement Plans for Freelancers

For those who earn freelance income, there are options to save for their retirement which are not available for traditional 9 to 5 workers. Which plan is better for you depends on how much you earn, what amount you wish to save, and whether you might hire employees. While it is better to understand all the options available for a freelancer, some of the best ones that are worth knowing about are given below.

One-Participant 401(k)

A one-participant 401(k) covers sole proprietors who have no other employee apart from their spouse. Also known as a solo 401(k), solo-k, uni-k, or one-participant-k, it is governed by the same guidelines and regulations as any other 401(k). Since in such a business the same person is both the employer and the employee, they can make contributions for both.

Under this plan, you can make salary-deferral contributions of up to 100% of the compensation but not above the annual limit. For 2020, the contribution can go up to $19,500. If you are aged 50 and above, it can go up to $26,000. The employer non-elective contribution under the plan has been defined as up to 25% of the compensation. However, under this plan, the total contribution should not cross $57,000 or $63,000 for those aged 50 and above. If your spouse is part of the business, then they can make the same contribution, which can then be matched. Under such a plan, the annual report needs to be filed on Form 5500-SF if they have assets worth $25,000 or more at year-end. An exemption is provided for those with fewer assets.


The Simplified Employee Pension (SEP IRA) is a modified version of the traditional IRA. An excellent choice for independent workers, although it does allow one or more employees also, this plan is easiest to set up and operate. Under this plan, the employer individually contributes to the fund. The contribution limit is capped at 25% of the net income or $57,000 for 2020 (whichever is lesser). This plan allows for flexible contributions. The deductions are made from the contributions for the year, and the money thus saved is not taxed until the time of withdrawal at retirement. However, if the amount is withdrawn before retirement, then it is subject to penalties along with the income tax.

Under this plan, one can make contributions right up to the deadline for tax filing. So it is a perfect plan for those who need last-minute tax deductions. Its simplicity makes it a good option for one-person businesses. Compared to an individual 401(k), a SEP IRA allows you to contribute more. However, you need to make quiet a good amount of money, as it is based on profit percentage. Setting up an account under this plan is simple and can be even done online.


The Savings Incentive Match Plan for Employees (SIMPLE) IRA allows employers and employees to contribute towards traditional IRAs that have been set up for employees. This plan is helpful as a start-up retirement savings plan for organizations that have fewer employees and find other plans costly. It follows the same rules as a SEP IRA – investment, rollover, and distribution – except that its contribution threshold is lower.

Under this plan, an employer has to match the contribution by up to 3% of the compensation or make a 2% non-elective contribution – the employee still receives an employer contribution, despite not contributing himself – of each eligible employee. For 2020, the employees can contribute a maximum of $13,500. Those who are 50 or above, you can contribute an additional $3,000.

Similar to the 401(k) plan, pretax employee contribution and tax-deductible employer contributions fund this plan. Penalties for early withdrawal penalties are heavy under this plan. If the withdrawal is made within two years of setting up the contribution, then the penalty is 25%.

Similar to other IRAs, financial institutions are needed to open this plan. These institution, in turn, will have their own rules on the types of investments that can be made under this plan and can charge a fee. The paperwork load for a SIMPLE IRA is heavier compared to a SEP IRA.


The ROTH IRA is a retirement savings account that lets you pay taxes upfront on the money you contribute. Since the tax is already paid at the time of retirement, you can withdraw the amount in full. You can keep contributing to your ROTH IRA as long as you work, even if it is past the retirement age. The only criterion is that your income should fall under the income limits.

If you earn over $122,000 when single or $193,000 when married, then your contribution to a ROTH IRA is limited. However, if you earn over $137,000 when single and $203,000 when married, then you cannot contribute to a ROTH IRA. In 2020, the maximum you can contribute is $6,000, and if you are 50 or above, you can contribute $7,000. This plan works best for those who are young and financially insecure, as they can get back the contribution at a later date without having to pay the tax. To be able to contribute to a ROTH IRA, you must open and maintain it outside of the retirement savings plan sponsored by your employer.

Keogh Plan

The Keogh Plan, or HR10, is one of the most complex retirement savings plans for self-employed individuals. Under this plan, you define the contribution to be made every year, which can be either a fixed percentage or sum. In 2019, the total contribution was capped at $70,000. The benefit was set at 100% of the employee’s compensation or $225,000 (whichever is lower).

To be able to use the Keogh, you must be a sole proprietorship, a partnership, a limited liability company, or a corporation. This plan is beneficial for high earners, as it allows greater contribution compared to other plans. Federal filing requirements are there for the Keogh plans, and a professional’s help is necessary because of the paperwork and complexity involved.

Health Savings Account (HSA)

A freelancer in most cases has to pay for the health insurance on their own, and individual health insurance deductibles are normally high. Starting a Health Savings Account (HSA) can be a great help in such a situation. Though an HSA is created for medical expenses, it can also help in your old age.

Funded by pretax dollars, the money within an HSA grows tax-deferred. One can let the money accumulate in an HSA year-on-year and can withdraw it after reaching the age of 65. If the withdrawal is for medical reasons (to reimburse your old costs or for any current treatment), then it’s tax-free. However, if the withdrawal is made for non-medical reasons, then you will have to pay income tax at the current rate.

To open an HSA, a high-deductible insurance plan (HDHP) needs to cover you. The IRS, for 2020, defines a high deductible as $2,800 for a family or $1,400 per individual. However, all plans don’t allow for an HSA. In case yours does, then you can contribute $3,550 on an individual plan and $7,100 for a family plan. If you are above 50, then you are allowed an additional catch-up contribution of $1,000.

Difficulties of Saving

Freelancing involves no regular income. One month, you might be flush from a big project, but the next month you might be looking for a project to keep you afloat. This lack of steady income affects savings towards retirement. As a freelancer, your income is something that is shaped by your own daily, weekly, or monthly choice on the type of work you can do and the amount of it you can manage. There is no steady stream of money that is handed out by an employer. Also, if you have any major debts, then a huge chunk of what you earn goes towards repaying it. High-interest loans, such as credit card debts, need to be prioritized before saving for the future, as the annual interests on such loans are greater than the returns one can expect from retirement savings.

Independent workers don’t have access to health insurance sponsored by employers. So they need to be ready in case of any health-related emergencies. They might even individually purchase health insurance, which entails higher premiums. Freelancers also need to continuously fine-tune their skills, which means additional education expenses. Although it costs nothing to start a freelance business, it does entail the cost of running the business. The equipment needed for the line of work chosen entails expenses that can run from a few hundred dollars to thousands. Add to it the cost of office supplies. Without any full-time employer, the freelancer will need to bear the costs for even basic necessities, such as pens, paper, and folders.

Another big issue facing freelancers is that they need to plan for their retirement savings themselves. There will not be any human resource official to help them understand a 401(k) plan application or any other retirement fund sponsored by the company. There won’t be any paycheck deductions, matching of contribution, or share in company stock. The individual will need to take into account how much they are earning and accordingly decide how much they can contribute towards the retirement accounts. One of the biggest impediments to this is the fact that the individual won’t really know how much he can set aside until the end of the year. According to experts, one should annually set aside 10-15% of their income towards retirement savings. If they can save more, then that’s even better.

Managing Retirement

Whether you agree or not, as soon as you start earning, you need to start saving for retirements. Even if your earnings are minor, the earlier you start, the better it is going to be, thanks to compounding. Remember, every little bit helps. One of the best ways to do this is by setting up an automatic contribution to your retirement account. Set up a reminder on a particular date every month. On that day, calculate your income for the month, and see how much you can contribute to your retirement plan.

Formulating a strategy for retirement is vital, especially for freelancers, as no one besides you is going to look out for your retirement. There are a lot of uncertainties in a freelancer’s life. You might end up thinking about short-term needs and neglecting saving for your retirement goals. Many people even believe that they should save for retirement if they are left with any cash at the end of the month. However, that should not be the case. You should keep aside a fixed amount every month on payday before planning any other expenses. Being self-employed does give you some amount of freedom, but that shouldn’t be made into an excuse for not saving for retirement. Learning to save for a long time is vital.

Also, in case you have earlier traditionally worked with a company and have accumulated any 401(k), keep track of it. If the balance is more than $5,000 you can leave them in their current account if you are okay with the investment options and fees. However, if you have more than one 401(k) or are unhappy with the investments, then you can roll them into a single IRA without any tax consequences.

It is always better to save more, as life expectancy is increasing and you need to support yourself as you age. You first need to decide how much money you will need to live every year after retirement. Normally, retirees live comfortably on 75-80% of their former salaries, as expenses tend to reduce post retirement. However, your circumstances and retirement requirements will change the income requirements.

The Social Security system will pay some amount after you retire – as long as you or your spouse has worked and paid taxes in the U.S.. The remaining expenses need to be met by the pension payments of your retirement savings if you have invested in a 401(k), HSA, IRA, or any other savings scheme. Since a freelancer can delay his retirement, they can also delay claiming their Social Security, which in turn could increase the benefit to which they are entitled.

With the wide array of options available for your retirement savings plan, you should carefully evaluate your choices and start saving. Time is a very important factor when it comes to building your retirement fund. If you are young, time is on your side. So start planning and start saving. If you have been into freelancing for a long time, you will be aware that your tax prep is going to be more complicated than an average employee’s. If you are confused on what to do, take the help of a tax or financial advisor to help steer you through retirement savings and what will work best in your financial position.

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