Freelancer? Working in the Gig Economy? Four Retirement Plans to Consider

As a freelancer, being fully committed to your business doesn’t mean you should ignore saving for retirement. Learn about self-employed retirement plans.

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4 min read
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Key Takeaways

  • Freelancers and others who are self-employed can access several tax-advantaged retirement account types
  • A solo 401(k) could help you save more than you might expect
  • Retirement plan contributions might be tax deductible for your freelancing business

As a freelancer, you know all about the hustle. In fact, there’s a good chance that you’re juggling several projects right now—and hoping not to drop any balls.

When it comes to retirement, unfortunately, many freelancers—including members of the so-called “gig economy”—tend to forget about setting money aside for a more secure financial future. In fact, according to a survey by small business portal Manta, 34% of self-employed people don’t have a retirement savings plan. 

Without a traditional employer to help you save, you might not even know your range of choices. The good news is that you have several plan choices as well as putting your money into a tax-advantaged individual retirement account (IRA), even if you don’t have a traditional employer. Here are four freelancer/self-employed retirement plans to consider.

1. SEP IRA (Simplified Employee Pension IRA)

Annual contribution limit (2020): The lesser of 25% of net self-employment income or $57,000 ($56,000 for 2019)

SEP IRAs offer high annual contribution limits, low setup costs, and minimal paperwork. You also have the flexibility of varying or even skipping your contributions based on the needs of your business. Although there are no catch-up contributions, the high limits should help compensate. Overall, the SEP IRA can be an attractive retirement vehicle for freelancers, whether you work solo or have employees.

Even if you consider freelancing a side gig and not a full-time profession, you could potentially benefit from a SEP IRA by saving on taxes on self-employment income. You can still set up a new SEP and contribute for 2019; you have until your 2019 tax deadline to do so. And if you have a 2019 tax extension, you can set up and contribute to a SEP until that deadline.

Caveats: If you expand your freelancing business to the point where you have employees, all of them must be included in your SEP retirement plan if they meet the IRS’s eligibility requirements. Each employee must also receive the same contribution percentage that you give yourself. And finally, all contributions are to be made by you, the employer, which can mean higher costs. But all the contributions—even for employees—are tax deductible to your business.

2. Solo 401(k) or Individual 401(k)

Annual contribution limit (2020): $57,000 ($56,000 for 2019), or $63,500 if you’re 50 or older ($62,000 for 2019)

If you work for yourself, own a business with your spouse or others, or if your spouse is your sole employee, you may be eligible for a solo 401(k) plan. Solo 401(k)s offer several potential advantages over other retirement vehicles

  • The eligible annual contribution limits are higher than those for most retirement account types.
  • The plan can be set up to permit Roth deferrals up to $19,500 for 2020 ($26,000 if 50 or older) per person.
  • Employer contributions via profit sharing can be combined with employee contributions.
  • The solo 401(k) allows you to borrow against your savings if a loan provision is offered in the plan document.

Caveats: If you are adding profit-sharing contributions to your plan to "max out" and get up to the 25% or 57,000 limit for 2020, there may be some special calculations involved, as discussed in IRS Publication 560. Our small business retirement contribution and eligibility calculator can help with this earned income calculation. Your solo 401(k) may permit the salary deferrals to be federally pretax or to be Roth deferrals. Roth deferrals are always taxed up front, but the earnings are tax-free in retirement. And finally, in some states, salary deferral contributions to solo 401(k) plans are not pretax for state tax purposes. 

If you’re younger than 50, don’t need a loan from the plan, and would be able to contribute the full amount desired to the SEP IRA, then a solo 401(k) might not be worth the extra work. Once your assets reach $250,000 in the solo 401(k), you’ll have to file IRS Form 5500 each year. And remember, you can’t have eligible non-owner employees in the plan besides your spouse. Employees become eligible once they meet your plan document requirements, which could be up to two years of service maximum.

3. SIMPLE IRA (Savings Incentive Match Plan for Employees IRA)

Annual salary deferral contribution limit (2020): $13,500 ($13,000 for 2019), or $16,500 for those 50 and older ($16,000 for 2019)

For businesses with 100 or fewer employees, the SIMPLE IRA aims to offer a less cumbersome salary deferral solution than qualified plans such as 401(k), 403(b), and 457 plans. It’s typically easier to set up and doesn’t involve the same degree of bureaucratic processes and paperwork that sometimes make other 401(k) plans onerous.

As a freelancer, you’re likely to be the only employee in your business, and it’s possible to take advantage of the potential benefits of this plan, which has higher contribution limits than a “regular” IRA. Your salary deferral contribution is a pretax deferral only, as SIMPLE IRAs do not allow Roth deferrals, unlike some solo 401(k)s.

Caveats: The plan’s mandatory employer contributions mean that you must match up to 3% of employee contributions dollar for dollar, even for yourself. So if you end up hiring employees to expand your freelancing business, you need to be in compliance. Alternatively, you could choose to contribute 2% of pay for all eligible employees, whether or not they made a salary deferral contribution. 

Not only is an employer contribution mandatory, but also, if you want to put more money away, you can’t. Either the 3% match or the 2% non-elective must be offered, and they cannot be combined or increased.

Coordinate with payroll to make at least monthly contributions to the plan, as employee salary deferrals must be timely. This may have a significant impact on your bottom line if your business is having a bad year. On the other hand, contributions are tax deductible to your business.

4. Traditional IRA

Annual contribution limit (2020): $6,000, or $7,000 for those 50 and older (same for 2019)

The main advantages of a traditional IRA are that it’s easy to set up, and you may be able to deduct your contributions. Because your deduction is claimed as an adjustment to your income, you can claim your tax break whether or not you itemize. Review IRS Publication 590A to see if you can deduct your traditional IRA contributions. Depending on your income, you may even be able to contribute to both a traditional IRA and a small-business retirement plan, getting a tax deduction for each. Any contributions you make, whether deductible or not, will be able to grow tax deferred. Of course, with a SEP IRA, you can always deduct your contributions as long as you have enough business income to justify your contribution.

For a freelancer hoping to get a little more out of tax-advantaged retirement accounts, this can be a big help.

Caveats: One potential downside is that if you or your spouse puts money in an employer-sponsored plan, and if your modified adjusted gross income is too high, you may not be able to deduct your contributions. In that case, consider opening a Roth IRA or SEP IRA instead, if you meet the eligibility requirements.

Another downside concerns the early withdrawal penalty of 10% if you take money out of your account before age 59 1/2. There is no general hardship exception, but there are exceptions for buying your first home, particular types of medical expenses, and higher education expenses. And all of the plans above have a 10% early withdrawal penalty, with some exceptions.

Freelancers: Start Saving for Retirement

Freelancers do have available retirement plans, and it’s a good idea to start saving as soon as you can. Many of the plans described above are offered with no additional annual maintenance charges, and if you do hire a professional to assist you, that expense is often deductible. The SECURE Act recently expanded plan tax credits to cover your startup costs, which can make these plans very attractive whether you can do it yourself or choose to get assistance.

A self-employed retirement plan is likely within reach. Whether you’ve just hung out your “open for business” sign, you’ve got a full-fledged side gig, or you’re a seasoned veteran freelancer, it’s a good idea to attempt to make the most of your money with the help of a tax-advantaged retirement plan.

TD Ameritrade does not provide tax advice. We suggest you consult with a tax-planning professional with regard to your personal circumstances.

Maximum contribution limits cannot be exceeded. Contribution limits provided are based on federal law as stated in the Internal Revenue Code. Applicable state law may be different. TD Ameritrade does not provide legal or tax advice. Please consult your legal or tax advisor before contributing to your IRA.

All investing involves risk including the possible loss of principal. 

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Key Takeaways

  • Freelancers and others who are self-employed can access several tax-advantaged retirement account types
  • A solo 401(k) could help you save more than you might expect
  • Retirement plan contributions might be tax deductible for your freelancing business

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