3 ways freelancers can save for retirement without a 401(k)


Robyn Parets

Robyn Parets

Blog author Robyn Parets

Robyn Parets is a personal finance and business writer based in Boston. A former writer for Investor's Business Daily (IBD) and NerdWallet, Robyn is also the founder and owner of Pretzel Kids, a children's fitness brand and online training course. You can find her on Twitter @RobynParets.

Published September 8, 2016|4 min read

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Freelancing certainly has its share of perks. Among them: You can make your own hours, work in your pajamas, and go to the gym in the middle of the day. Yet, the flexible lifestyle of a freelancer often means inconsistent income and it certainly doesn’t come with the benefit of an employer-sponsored 401(k) to help you save for retirement.We get it: saving for retirement might not be your highest priority, particularly if you’re concerned about paying for short-term expenses, like rent, your cell phone bill, and the WiFi that keeps your business running. You might also have students loans to pay off and want spending money for the weekends.

But with a little discipline, saving even $100 a month for your retirement makes a bigger difference than you might think, according to Freelancers Union, an organization which advocates for freelance professionals. Why? Because the sooner you start investing in a retirement plan, the more money you’ll have down the line to enjoy your golden years.In fact, thanks to compound interest, if you start investing a hypothetical $1,200 a year – or $100 a month – at a 6% rate of return when you’re 40, you’ll have $69,787 when you turn 65. But if you had started investing that same annual amount at age 18, you’d have a whopping $347,203 by the time you hit 67, according to Charles Schwab.The reality is that you don’t need an employer retirement plan to start saving for your future. Although it would be great to have a 401(k), particularly as employers often match a percentage of your contributions (free money), they’re not the only way to save for retirement.

The easiest way to save for retirement is with an individual retirement account, or IRA. IRAs are tax-advantaged, just like 401(k)s. You don’t have a few different options when it comes to IRAs, so let’s weed through our top three picks for freelancers:

1. A Roth IRA

With a Roth IRA account, you can contribute up to $5,500 a year after taxes (and $6,500 a year if you’re over 50) and your money will continue to grow until you can start withdrawing it at about age 59 ½. The best thing about a Roth IRA is that when it comes time to take the money out, you can do this tax-free (as you contributed funds after paying taxes). There is some flexibility with a Roth IRA in that you can take funds out before you hit retirement age to buy a house, pay for educational expenses and cover medical costs. There are also some income limits for contributions. For example, you can contribute the maximum amount if you earn less than $117,000 or are filing jointly with a combined income of less than $184,000. You can contribute reduced amounts if you make up to $132,000 or $194,000 filing jointly. After that, you can no longer take advantage of a Roth IRA.

2. A traditional IRA

If your income exceeds the maximum limits to invest in a Roth IRA, a traditional IRA is another viable option. Unlike a Roth IRA, you will eventually have to pay taxes on your account when you withdraw the funds upon your retirement. But like a Roth IRA, you can withdraw funds early without a penalty if you can prove you’re using the money to buy a house or cover costs for school or medical expenses. And, a big perk for freelancers: You can contribute the same annual $5,500 as you can with a Roth IRA and you can deduct the entire amount off your freelance income.

3. A Simplified Employee Pension (SEP) IRA

Although the full name of this type of retirement account can be deceiving for a sole freelancer, a SEP IRA is designed for both small business owners with employees as well as independent freelancers. A SEP IRA allows you to sock away up to 25% of your earnings each year. Depending on your income and how much you can afford to save, this is often the best way to go as it allows you to contribute a significant chunk of your income – up to a maximum of $53,000 annually. A SEP IRA also follows the same basic withdrawal rules as the other IRAs listed above.

It’s simple to open any of the above types of IRA accounts through a brokerage house of your choice, or an online advisor like Wealthfront or Betterment. Yet, before deciding which type of IRA is best for you, it’s a good idea to talk to an accountant or financial advisor. The most important thing: Open an IRA now as the longer you wait, the less you’ll have when you retire.

Image: Alejandro Escamilla