The Best Retirement Savings Plans For Freelancers
/If you are self-employed, saving for retirement with inconsistent income is certainly a challenge, but it is not impossible. As a freelancer and self-employed person, you are on your own when it comes to saving for retirement, unlike an employee who might have access to a 401(k).
It’s important that you work on building your wealth early so that you can put money aside for the use of independent living communities or other retirement travel plans that you have and also to ensure financial security to get memory care services when needed. No matter how you do it, your retirement deserves to be comfortable and that requires the security of the cash you acquire throughout your years right now. Whether self-employed or not, comfort matters!
It’s important that you work on building your wealth early so that you can put money aside for the use of independent living communities or other retirement travel plans that you have No matter how you do it, your retirement deserves to be comfortable and that requires the security of the cash you acquire throughout your years right now. Whether self-employed or not, comfort matters!
Thankfully, there are several choices for self-employed people when it comes to retirement savings options. The first step to saving for retirement when you are a freelancer is to figure out how much you need to save for retirement each year. Second, decide on the account where you want to put that money.
If you are a self-employed person and wondering how you could contribute to a self-employed retirement account, keep reading to learn more about the retirement savings plan options such as an IRA (traditional or Roth), a Solo 401(k), a SEP IRA, or a SIMPLE IRA for self-employed people:
The Traditional IRA
A traditional IRA is best for those self-employed people who are just starting out to save for retirement. If you have an old 401(k) account, you can also roll your old 401(k) into an IRA.
The contribution limit for a traditional IRA is up to $6,000, plus $1,000 catch-up contribution for those who are 50 years old or older.
If you open a traditional IRA, you can make tax-deductible contributions to this plan, which means withdrawals of your funds in retirement are tax-free. You will usually pay a 10% penalty for withdrawals before age 59½.
Opening a traditional IRA is probably the easiest way for self-employed people to start saving for retirement. You can open an IRA for self-employed people easily online, and contribute to your own IRA whether or not you have employees. If you add in employees, they can set up and contribute to their own IRAs.
As long as you have owned your IRA account for a least 5 five years and you are 59½ or older, you can withdraw your money when you want to without any federal taxes.
The Roth IRA
A Roth IRA is an excellent option for self-employed people to save for their retirement. Like a traditional IRA, the contribution limit for a Roth IRA is up to $6,000 per year, plus a $1,000 catch-up contribution for those who are 50 years old or older.
A Roth IRA may be the best IRA to open if you are just starting out your business. The Roth IRA has income limits for eligibility, so those who earn too much cannot contribute to it.
The Roth IRA is an excellent retirement savings option for the self-employed people because Roth IRAs offer tax-free growth of their contributions and tax-free withdrawals of their contributions in retirement.
You can withdraw your contributions from your Roth IRA account at any time for any reason, without penalty. Having access to contributions without penalty can be helpful for self-employed people who may be struggling with inconsistent income at any given time.
The Individual 401(k)
An Individual 401(k), also known as a solo 401(k), is the best retirement savings plan for a self-employed person or business owner with no employees, except a spouse, if applicable. You can contribute to a solo 401(k) plan as an employee of yourself and also as an employer of yourself.
An Individual 401(k) works just like a standard employer-sponsored 401(k) plan. You make tax-deferred contributions to your solo 401(k) account, but distributions of your funds after age 59½ are taxed.
The contribution limit to a solo 401(k) is up to $57,000 in 2020 if you are below 50 years of age. But if you are 50 or older, you can take advantage of a $6,000 catch-up contribution. Unlike other retirement savings plans for self-employed people, the Individual 401(k) plan allows you to contribute up to 100% of your income to maximize your contributions.
If your income is low, but you want to maximize your contributions to a retirement savings plan, then the solo 401(k) plan is the right plan for you.
You cannot contribute to a solo 401(k) if you have employees, but you can hire your spouse so he or she can contribute to the plan. If you hire your spouse, he or she can contribute up to the standard employee 401(k) contribution limit. You can also add in the employer contributions, for up to an additional $57,000 total, plus catch-contribution, if eligible.
Once you have more than $250,000 in your account, you will need to file a form 5500 with the IRS each year once. You can avoid filing paperwork by opening a second account and maintaining the balance of each account below $250,000.
The contribution limits to a solo 401(k) plan apply per person, not per plan. This means if you also have outside employment that offers a 401(k), or your spouse does, the contribution limits cover both plans.
The SEP IRA
A SEP IRA, which stands for Simplified Employee Pension Plan, is best for self-employed people or small business owners with no or few employees.
The maximum contributions you can make per year are $57,000 in 2020 or up to $25% of your earnings, whichever is less. There are no required minimum contributions. Contributions in your SEP-IRA account are not taxed until you start withdrawing your funds from the account. This means you can save thousands of dollars in taxes each year.
SEP IRAs have a low administrative burden and do not require annual reporting to the IRS.
If you want to hire people for your company, you will have to contribute an equal percentage of salary for each employee that you put in yours as an employee. But you do not have to contribute to a SEP IRA every year if you are having a down year.
If you have more than a few employees or if you would like to put away a lot of money for your own retirement, then this plan can be costly.
The SIMPLE IRA
A SIMPLE IRA, which stands for Savings Incentive Match Plan for Employees of Small Employers, could be the best retirement savings plan for self-employed people who have a small company with up to 100 employees.
Your contributions in a SIMPLE IRA are tax-deductible, but distributions in retirement are taxable. If you are a self-employed person who has a small company with fewer than 100 employees, a SIMPLE IRA could be the best retirement savings plan for you.
As an employer, you must make some form of contributions annually to your employees' accounts. But an employee may or may not choose to contribute to their account. An employee can contribute up to $13,500 in 2020, plus a catch-up contribution of $3,000 if he or she is 50 years old and over.
You can choose to either make a dollar-to-dollar match of up to 3% of an employee's salary or contribute a flat 2% of pay whether the employee contributes or not. But the matching contribution can be reduced to less than 3% but must be at least 1% if you have a down year. This exception is only allowed in 2 out of 5 years.
While contribution limits in a SIMPLE IRA are significantly lower than a SEP IRA or solo 401(k), it can be expensive if you have a large number of employees because you must have to make contributions to your employee accounts.
Individual Roth 401(k)
Any money you put into an Individual Roth 401(k) is not tax-deductible. If you would like to make after-tax contributions now to take advantage of withdrawals that are tax-free later, then an Individual Roth 401(k) plan may be the right option for you.
Conclusion
Once you have decided which retirement savings plans for self-employed people is right for you, make sure you choose a reliable broker to open your account with.
The best retirement plan for you as a self-employed person will depend on the size of your business, how much money you think you can afford to save for retirement, and your personal vision of what retirement means to you.
Disclaimer: the content presented in this article is for informational purposes only, and is not, and must not be considered tax, investment, legal, accounting or financial planning advice, nor a recommendation as to a specific course of action. Investors should consult all available information, and consult with appropriate tax, investment, accounting, legal, and accounting professionals, as appropriate, before making any investment or utilizing any financial planning strategy.
