Know Your Options

A whopping 53 million Americans, which equates to more than a third of all U.S. workers, currently make their living as freelancers and will need retirement planning to maintain their financial security later on down the line.

Freelancers don’t have access to a corporate 401(k), so what are they doing with their savings intended for retirement? Don’t settle for a low-yielding savings account; instead, opt for an advantageous retirement plan that offers tax benefits. While IRA, SEP, SIMPLE IRA, or solo 401(k) may seem like an enigma at first glance – we’re here to crack the code and make sure that you relax in your retirement years.

[Related: Why and How You Should Start Saving for Retirement Before You Hit 35]

Start With 15 Percent

Before we delve into the details of each plan, let’s take a look at where you currently stand. Taking control of your future? Start setting aside roughly 15 percent of your annual income before you turn 35 if you want to retire comfortably at 65, according to the Center for Retirement Research at Boston College. By postponing your retirement until the age of 70, you can reduce the amount that needs to be saved for retirement each year to approximately 6% of your annual income.

Consider the positives of freelancing; even with an inconsistent source of income, you have distinct advantages. Jean S. H. Schwarz, MBA, and CFP who is also the founder and managing director at Lumina Financial Consultants, LLC can vouch for this! “Those who work as solopreneurs have some special tax-related opportunities to optimize their financial situation.”

As a self-employed individual, filing an annual Schedule C tax form can open up the ability to deduct various essential business expenses such as phone bills, meals related to work, transportation costs, and entertainment. As Schwarz mentions, you can also receive deductions by purchasing self-employed health insurance and making tax-free contributions to a Health Savings Account (HSA). This puts away money for covering future medical costs. When you invest in a retirement account, consider that as money saved from the tax deductions available through owning your own business – it’s like retaining those funds for longer. Schwarz explains this brilliantly.

[Related: 7 Retirement Myths You Should Know Are Totally False]

This all adds up, meaning more financial security for your retirement.


The Individual Retirement Arrangement (IRA) is undoubtedly the most popular retirement plan available. An IRA account is a fantastic way to set yourself up for retirement by taking advantage of either tax-free growth opportunities (paying taxes before you add deposits) or the option to pay taxes upon withdrawal. According to Cary Carbonaro, CFP, MBA, and author of The Money Queen’s Guide, there are three kinds of IRAs — traditional, Roth, and rollover — each with their unique benefits.

[Related: 11 Millennial Savings Account Confessions]

The traditional IRA capitalize on tax savings while making contributions: By contributing to your retirement funds, you can watch your earnings grow up tax-free until it’s time for you to enjoy the fruits of your labor. Rest assured, you will be taxed upon withdrawal of your funds; however, the rate may not be as exorbitant as one would presume. “Many retirees find themselves in a lower tax bracket than they were in pre-retirement,” notes Carbonaro.

The Roth IRA operates in a nearly inverse manner. “With a Roth IRA, you make contributions with money you’ve already paid taxes on (so, after-tax). That way, your money may potentially grow tax-free and you get tax-free withdrawals from the plan in retirement, provided that certain conditions are met,” says Carbonaro. To access the funds associated with a Roth, you must reach age 59½. Additionally, if filing as a single individual, your modified adjusted gross income cannot exceed the $129,000 examples associated when withdrawing with Roth IRA.

The rollover IRA If you want to make the switch from a corporate job to freelancing, then this is an ideal opportunity for you! Don’t let your 401(k) dust collect – continue to make progress and transfer it into a Rollover IRA. This way, you can keep building upon the foundation of what you had before! With this IRA, you have all the benefits of a traditional retirement account, plus an amazing bonus: You won’t incur any taxes if you decide to move your money into another type of retirement plan like a Roth IRA. According to Fidelity Investments, this is one advantage that makes it worth considering.


If you’re beginning your freelance career and don’t have much to put away, Schwarz advises setting up a Savings Incentive Match Plan for Employees (SIMPLE) retirement plan. This is the perfect choice if you need an affordable way to save for retirement! SIMPLE plans have more restrictive contribution limits compared to SEPs and solo (k)’s (view the following slides for details). In 2015, contributions may not exceed either your net income or $12,500 – whichever is lower. The SIMPLE plan lives up to its name – it’s easy to begin and maintain. When you contribute your pre-tax dollars to the plan, you defer paying taxes until the time comes for when money is distributed after retirement.


Schwarz suggests that if you are looking to save more money (up to 25 percent of your salary or $53,000 for 2015; whichever limit comes first), a Simplified Employee Pension Plan (SEP) may be the perfect solution. Not only is this plan simple to establish and manage on your own, but hiring outside help isn’t necessary either! To capitalize on this plan, you must have a net income of $265,000 or greater. Since SEP earnings are tax-deferred until withdrawal, if you prefer to postpone paying taxes for as long as possible then SEP may not be the best fit for your needs.

Solo 401(k)

When approaching retirement age and you’re not as financially stable as you’d hoped to be, look into a “solo (k).” This style of 401(k) plan is intended for freelancers who have no employees. It’s also referred to as a one-participant 401(k). Take advantage of this option and secure your financial future! For those over the age of 50, you may be eligible to contribute a maximum of $24,000 toward your retirement annually – this is higher than the normal limit of $18,000. Additionally, you can add up to 25% of any personal profits from your business as a type of “profit-sharing,” just like what major corporations use. Make sure to take advantage of and maximize these contributions!

“A 401(k) plan has more complexity than a SEP but is generally worth it for those who want to maximize their retirement savings,” Schwarz proclaims. To elucidate, the IRS necessitates an annual report for one-participant 401(k)s that is similar to those filed by companies. “Fortunately, many financial institutions have simplified plans for those who work as solo entrepreneurs,” Schwarz expands further on the subject.

Investing in a professional to set up this type of account is likely the best way to go. However, if you’re looking for increased tax savings or getting ready to retire, it’s worth every penny!

Mix It Up

If you’d like to retain some freedom in your commitments, why not keep the same outlook that led you to freelance? Flexibility is key! Unlike the retirement plan that you enroll in when employed by one company, when you are self-employed there is a vast selection of plans to choose from. (Warning: Be mindful of the contribution limits for both an IRA and a Roth to avoid paying taxes on any extra contributions.) “For someone who works for themselves, they have the flexibility to see which plan works best for them. This can change from year to year depending on your income,” According to Carbonaro. That kind of relief could be the difference between retaining your youthfulness and not!

Originally featured on Daily Worth, this article will help you make the most of your resources.

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