Top Retirement Strategies For Freelancers

Freelancers have unique challenges and opportunities when it comes to saving for retirement. You don’t have an employer-sponsored retirement plan. No one is giving you a matching contribution. You’re not getting any shares of company stock. However, as a small business owner, you can potentially save a higher dollar amount and a higher percentage of your income than an employee can. Here are some top strategies for freelancers to plan for a successful retirement.

Rollover IRA

Most freelancers worked for someone else before striking out on their own. If you had a retirement plan with a former employer, have you kept tabs on it? Most of the time, the best way to manage the retirement savings you accumulated at your old job is to transfer them to a rollover IRA. A rollover IRA lets you transfer all the assets in your former employer’s plan, such as a 401(k), 403(b), or 457(b), into a rollover IRA, a type of traditional IRA. You’ll be able to choose your own investments and you’ll have greater control over your account. Be sure to avoid the common IRA rollover mistakes.

Self-Employed 401(k)

As long as you don’t have any employees, you can contribute to a self-employed 401(k). You make contributions with pretax dollars, which reduces your taxable income.  If you’re married, your spouse can participate, too. Like an employee of a company that offers a 401(k), you can defer $17,500 of your income into a self-employed 401(k) in 2014. Unlike an employee, you can also make what’s called a “profit sharing contribution” of as much as 25% of your compensation, up to a maximum of $52,000 in 2014. Regardless of how you classify your contributions, the most you can contribute is $52,000 in 2014, but that’s three times what you could contribute to a 401(k) plan if you worked for someone else. If you’re 50 or older, you can also make catch-up contributions. Use a free self-employed plan contribution calculator to easily figure out how much you’re allowed to contribute based on your income.

A simplified employee pension (SEP) is another retirement savings vehicle available to freelancers, but a self-employed 401(k) typically allows you to save more. You can learn all about this other option in our SEP IRA tutorial.

Roth or Traditional IRA

Roth and traditional IRAs are available to anyone with employment income.  That includes freelancers, and you can contribute to an IRA in addition to a self-employed 401(k). A working spouse can also contribute to an IRA on behalf of a nonworking spouse. Roth IRAs let you contribute after-tax dollars, while traditional IRAs let you contribute pretax dollars. The maximum annual contribution is $5,500 in 2014 or your total earned income, whichever is less.  If you’ve maxed out your contributions to your self-employed 401(k), or if you want to make a combination of before-tax and after-tax contributions, add a traditional or Roth IRA to your retirement portfolio.

Set Aside Money Throughout the Year

Because the amount you can put in your retirement accounts depends on how much you earn, you won’t really know until the end of the year how much you can contribute. So unlike an employee, you won’t be taking small amounts out of each paycheck and putting them in your retirement account. However, if you wait until the end of the year to set aside a chunk of your income, you might find that the money isn’t there because, well, you’ve spent it.

To make sure you have money available to contribute to your retirement account, set up a regular old savings account that you contribute to each month. Once you’ve determined what you’re eligible to set aside in your retirement account(s) for the year, which will usually be at the end of the year or at tax time, you can transfer the money from your savings account to your retirement account(s). If you’ve saved more than you’re allowed to contribute and you don’t need the money for something else, keep it in your savings account, because you might be able to make a larger retirement contribution next year.

The Bottom Line

Creating a retirement strategy is extra important when you’re a freelancer, because there’s no one looking out for your retirement but you. Although you don’t get perks like company stock or “free” money in the form of an employer’s matching contribution when you’re self-employed, you get something better: all the freedom that comes with being your own boss, complete control over how your retirement contributions get invested and the possibility of saving more than you’d be able to if you worked for someone else.