As a freelance copywriter, you’re probably focused on building your portfolio, attracting clients, and growing your income.
But, it’s never too early or late to think about how to save for your future retirement. (Your silver-haired self will be grateful for it.)
As a freelancer, though, you don’t have access to an employer-sponsored 401K plan, which means you need to build your own 401(k) for freelancers.
In this post, I’ll show you how to open a 401(k) without an employer. You’ll be able to make an informed choice about how to fund your golden years to enjoy your hard-earned payoff.
1. Roth IRA
What it is: A Roth IRA is a tax-free investment account that you fund with after-tax dollars. Unlike other retirement plans, you can withdraw your contributions anytime without penalties or taxes.
Plus, you get flexibility in investment options while enjoying tax-free growth and withdrawals.
How it works: Your earnings grow tax-free, which lets you withdraw your contributions. This means your investment will grow without having to pay taxes after the age of 59.
For 2021, the maximum contribution limit for a Roth IRA is $6,000 if you’re younger than 50. For those 50 or older, the limit is $7,000. But, these may change depending on the inflation rate and tax law updates.
As a freelancer, you can contribute as long as your income is in the eligibility range. One of the benefits of Roth IRA is its flexibility in investment options. Also, you can choose from a variety of investment alternatives, like stocks and bonds.
If you want to learn how to have a smooth and stable income as a freelancer, read my blog post where I show you to ensure your solopreneur success.
But, this is important to remember to build a nice 401(k) as a freelancer: diversify your portfolio, so you’re protected from market volatility and can achieve your retirement goals faster!
Who it’s ideal for: This is ideal for freelancers who want to take advantage of tax-free growth and haven’t reached their peak earning years yet.
2. Traditional IRA
What it is: A traditional IRA is a tax-deductible account in which you contribute pre-tax dollars. Your tax-deductible contributions lower your taxes and help your investment grows faster.
How it works: To open a traditional IRA account, you have to work with someone qualified, such as a bank or investment firm. Once you open an account, you can contribute up to $6,000 per year, or $7,000 if you’re over 50. You can contribute until the deadline the following year.
For example, let’s say you’re filing taxes in 2021. You could make contributions for 2020 until April 15, 2021. Your money is invested in a wide range, including stocks, bonds, mutual funds, or exchange-traded funds (ETFs).
You can choose your investments, or work with a financial advisor to help you through the complicated stuff.
Who it’s ideal for: This is a popular choice for self-employed solopreneurs who want to open a 401(k) without an employer. Especially if they want to reduce their taxable income now while expecting to pay lower taxes in retirement.
3. SEP IRA
What it is: A Simplified Employee Pension (SEP) IRA is a tax-deductible account that you set up as a self-employed person. As a self-employed business owner, you can contribute a portion of your income and defer taxes on your contributions and the earnings they generate until withdrawal.
How it works: One of the biggest advantages is its availability for self-employed individuals and small business owners. If you’re self-employed or a freelancer, you’re good to go!
As a freelancer, you can contribute up to 25% of your net compensation or $57,000, whichever is less, to a SEP IRA account. Your contributions are tax-deductible, which means you can lower your taxable income in the current year.
One of the main benefits of a SEP IRA is you don’t have to contribute every single year. You can contribute the maximum amount in one year and skip a year or two if necessary. Your contributions will be available for withdrawal penalty-free after you’re 59.
Who it’s ideal for: As a freelance copywriter, your income may fluctuate. This makes it harder to build your own 401(k) as a freelancer. A SEP IRA makes things easier by having you only contribute 25% of your net income each year.
In simple words, you aren’t locked into contributing the same amount each year. Also, compared to other retirement plans, there’s little work in setting up a SEP IRA. For those who can, you open up your own 401(k) without an employer.
One way to avoid a fluctuating income? Have your clients always pay you on time. Learn how to remind someone to pay you in a professional and respectful manner in my blog post.
4. Solo 401K
What it is: Solo 401K is similar to a 401(k), but it’s designed only for sole proprietors with no employees. You can contribute as both an employer and employee, plus an additional 25% of your self-employment income as an employer contribution.
In other words, you can contribute a portion of your pre-tax income – plus any profits generated from your freelance business to your 401(k) retirement.
How it works: As an employee of your freelance business, you can contribute up to 100% of your income to the Solo 401(k) – at least, up to the IRS-established limit. As an employer, you can contribute an additional 25% of your income or up to a total of $58,000.
With the Solo 401(k), you can save a lot more than with a traditional IRA. Additionally, you have complete control over your investments, making it easier to reach your financial goals.
You can either do it yourself through an online Solo 401(k) provider or get help from a financial advisor to set it up for you. You can even contribute from home.
Who it’s ideal for: Simply put, an individual 401(k) is a great option for the self-employed, solopreneurs, or business partners whose only employees are spouses. This is definitely a top choice for a 401(k) for freelancers who are doing it solo or with their spouse.
5. Simple IRA
What it is: A Savings Incentive Match Plan for Employees (SIMPLE) is a low-cost option for entrepreneurs who employ less than 100 people. You can contribute up to $13,500 ($16,500 if you’re over 50) to your Simple IRA and match up to a tiny portion of your employee’s compensation.
This one’s popular for small business owners or freelancers because it’s easy to open as a 401(k) without an employer.
How it works: A Simple IRA account allows you to save up to $13,500 per year (as of 2021). You can make pre-tax contributions, which means what you contribute will reduce your taxable income.
Your contributions and any employer contributions grow tax-deferred until you withdraw the funds during retirement. You can start withdrawing funds penalty-free after you’re 59. If you withdraw funds before then, you might face a 10% penalty.
Who it’s ideal for: A Simple IRA is an excellent choice for freelancers since it’s easy to set up and offers more flexibility for your contributions. Additionally, the employer can match up to 3% of the employee’s contribution, meaning your retirement fund grows faster.
How to choose the right 401(k) freelance savings plan for you
- Your tax bracket plays a crucial role; do you want to pay now or later?
- If you’re married and both earning an income, you can contribute to both of your retirement savings plans.
- Decide on your financial goals and whether you’re looking for immediate or long-term benefits.
- Lastly, determine when you need to access your retirement fund.
By considering the above factors you can make an informed decision that will benefit you in the long run as you build your 401(k) as a freelancer.
How to make your retirement savings grow faster
It isn’t enough to just know how to open your own 401(k) savings without an employer. You have to be smart about how you do it.
Once you know how to be smart with your freelance earnings, you’ll see a bigger retirement fund in your golden years to be grateful for.
Here are a few of the best savings tips for a 401(k) for freelancers.
Save for an emergency first
Before you even think about saving for retirement, you need to have an emergency fund. As a freelancer, you never know when you may experience a dry spell in work, or get hit with an unexpected expense.
Saving for an emergency fund should be a top priority. A smart rule is to always have at least three to six months’ worth of money saved up as your “safety net.” This will ensure you’re financially secure during a time your business is running dry.
Put away 30% for state and federal quarterly tax payments
As a freelancer, you’re responsible for paying your taxes. But, rather than get hit with a big tax bill at the end of the year, put money away each quarter to cover your state and federal tax payments.
A wise rule of thumb is to always set aside 30% of your income for taxes. This will make sure that you don’t get hit with a dreaded tax bill come tax season. And it’s going to make budgeting for your golden retirement easier
Set a realistic savings goal
Saving for retirement can be overwhelming and takes time to build over your life. This is why it’s important to set a realistic savings goal each month depending on what you can put aside.
A suggestion I have to offer is to put aside 15% of your income each year for your retirement. But, maybe this isn’t feasible for you.
Consider your current expenses, income, and lifestyle to determine a savings goal that works for you. Once you crunch the numbers, set up automatic contributions to your retirement account each month to make sure you’re consistently saving.
Stay disciplined and stay on track
Remember that saving for retirement is a long-term goal that demands consistency. So, it’s important to stay disciplined and stay on track.
Avoid touching your retirement savings for anything other than your eventual retirement. Keep track of your progress and adjust your 401(k) savings plan as needed. Keep in mind that the earlier you start saving, the better off you’ll be when retirement does eventually call.
The Bottom Line on 401(k) Retirement Plans for Freelancers
Retirement can be a beautiful transition. It’s never too early or too late to start planning your future.
Investing in the right plan based on your lifestyle and goals will let you achieve an amazing retirement. So, take charge of your future today with your 401(k) as a freelancer.
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