Retirement

How to Save for Retirement as a Freelancer

No company 401(k), no problem. See how you can build a retirement nest egg as a freelancer or a self-employed worker.

These days, the gig economy is alive and well, with 36% of the U.S. workforce doing some kind of freelance work, according to a recent study by Upwork and the Freelancers Union. As self-employment opportunities and side hustles continue to gain favor with workers, it’s even projected that freelancers will be the majority of the workforce by 2027, based on recent growth.

Freelancing has a variety of perks—among them, the ability to set your own schedule, be your own boss and achieve a better work/life balance. But there are also some downsides, such as the lack of employer-provided benefits and any kind of employer-sponsored retirement account, such as a 401(k). That makes things trickier when saving for retirement, but it doesn’t have to derail your retirement planning.

“As a freelancer, you don’t have a 401(k), and sometimes that’s viewed as a negative,” said Andrew Westlin, a financial planner with Betterment. “But you then have the flexibility to choose any provider you want, so you can find one that’s transparent and that has low fees.”

In fact, there are a variety of options for freelancers when it comes to saving for retirement—and different investment savings accounts are good for different needs.

How to save for retirement without a 401(k)

According to T. Rowe Price, 33% of gig workers aren’t saving anything for retirement—11% by choice and 22% because they don’t have a 401(k) or 403(b) available to them. But the good news is that 41% of gig workers feel that doing independent work has made them much more involved with their personal finances. It’s just one more step to start saving for retirement.

There are a few common investment accounts freelancers can use to save for the future:

Roth and traditional IRAs

The purpose of an Individual Retirement Account (IRA) is to help individuals set aside savings for retirement. Whether you choose a Roth IRA or a traditional IRA, both accounts are available to everyone with an income, not just the self-employed. If you’re 50 or under, you can put up to $5,500 into a Roth or traditional IRA (or a combo of the two) every year. If you’re over 50, you can put in another $1,000.

The money you put into a traditional IRA is pre-tax, meaning you’ll pay taxes when you withdraw funds in retirement. For a Roth IRA, you pay taxes on the money before you save it, so everything you take out later is tax free. You can open an account online at one of various brokers, such as Vanguard, Fidelity or Betterment.

“If you just want to put away up to $5,500 a year, then the simplest thing to do is just a straight, traditional IRA or Roth IRA,” said Howard Pressman, a financial planner in Vienna, Virginia.

If you’re eligible, Pressman recommends splitting your savings for retirement between the two types of IRAs. “I’m a big fan of having a diversified pool of assets in retirement from which to draw, based on the tax rules that are in effect at the time,” he said.

In general, a Roth IRA benefits younger investors who are saving for retirement because they have lower taxable income, such as Dustyn Ferguson, 21, who maxes out a Roth IRA every year for retirement. “I prefer the idea of paying taxes now, rather than later, as I am young and in a lower tax bracket than I predict I will be when I’m retiring,” said Ferguson, a freelance writer and ghostwriter from Newport, Rhode Island.

SEP IRA

A Simplified Employee Pension IRA (SEP IRA) is a retirement account for anyone with freelance income. Freelance workers can put up to 25% of net earnings from self-employment or $55,000—whichever is less—into a SEP each year. The account is easy to set up—you can do it online, just like a traditional IRA—and contributions are deductible.

“The thing about the SEP is that you can just open it and put what you want into it,” said Kristi Sullivan, a financial planner in Denver. “And you can open it and fund it by April 15 of the year after you’re trying to contribute for.” So, for instance, you can open and fund a SEP for 2018 contributions up to April 15, 2019.

Michelle Davis, 49, puts as much as she can—up to the SEP IRA contribution limits allowed—into her SEP account each year. “This has a dual purpose,” said Davis, a freelance writer in Silver Spring, Maryland. “It helps me lower my taxable income significantly, and it also allows me to save for retirement.”

Davis makes the finances work by taking half of every paycheck and depositing it into a separate account as part of her saving for retirement strategy. “The only thing I use this money for is taxes and retirement,” she said.

Solo 401(k)

Just like it sounds, this is a 401(k) account for one person. As with a regular 401(k), you can put up to $18,500 into this account—or $24,500 if you’re 50 or older. But since you’re both employer and employee on this plan, you can also make contributions as an employer (kind of like matching yourself), so your total contribution may be higher. Depending on IRS calculations and your income, you can put in up to $55,000 each year. Unlike a SEP, you must open an account by Dec. 31 of the year in which you want to contribute income. So if you want to contribute for 2018, you must open the account by Dec. 31, 2018.

“Ultimately, both a SEP and a Solo 401(k) will allow you to put in $55,000 as a maximum in 2018,” Sullivan said. “But with a SEP IRA, you have to make more money to get to that $55,000 mark. With a Solo 401(k), you can put in up to 100% of your net income, so if all I net is $18,500, I can put that in. If you’re earning less, you can put more into the plan.”

Barbara Brody, 41, aims to put away 10% of her pre-tax income in a Solo 401(k). “It was definitely easier—and less mentally painful—when I had an employer automatically taking some money out of my paycheck,” said Brody, who works as a freelance writer in Larchmont, New York. “Now I have to consciously think about taking money out of our checking account and moving it to my retirement account.”

For Brody, saving for retirement is the long-term motivation, but living in a high-tax state is also a carrot: “In the short term, we’re even more motivated by trying to defray our tax bill at the end of each year.”

Retirement plans for freelancers

Retirement savings plan2018 contribution limitsCatch-up contributions?Contribution type
Traditional IRA$5,500 per individualExtra $1,000 if you're age 50 or olderPre-tax
Roth IRA$5,500 per individualExtra $1,000 if you're age 50 or olderPost-tax
SEP IRA25% of compensation or $55,000, whichever is lessNoPre-tax
Solo 401k$18,500 in elective deferrals, plus 25% of compensation in employer contributions, up to a maximum of $55,000 for certain individualsExtra $6,000 in deferrals if you're age 50 or olderPre- or post-tax
Note: Traditional and Roth contributions are subject to the same limit, meaning individuals can only contribute up to $5,500 to both accounts in total, not $5,500 in each.

How much to save for retirement

It's difficult to calculate exactly how much you'll need to save for retirement. Depending on your age, the amount of debt you carry and the money you’ve already saved, that could look very different from one person to the next. But as a general guide, our experts recommend putting 10% to 15% of your income toward retirement each year. If you can afford to contribute more, that's even better.

But before you start making contributions, take a look at your debt load. Freelancers who carry high-interest loans, such as credit card debt, should prioritize paying off that debt before contributing to retirement, since the annual interest you're paying on these loans is greater than the returns you can expect from your retirement investments.

On the other hand, if you have low-interest debts, such as a mortgage or federal student loans, it makes good sense to start saving for retirement sooner rather than later while keeping up with your loan payments.

Kate Ashford

Kate Ashford is a writer and content creator who specializes in personal finance, careers, health and consumer trends. Her work has appeared online at the BBC, Forbes, Monster and LearnVest, as well as in national publications, including Money, Parents, Family Circle and Women's Health.

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