Retirement Savings 101 For Freelancers

The working world has really changed since your grandfather's time.

He could have expected to get a job, stay there for 30 years, maybe climb the corporate ladder, and retire with a gold watch and a pension.

As for you? Seems like nobody wants to pay the taxes required to hire you as an employee, or even give you enough work to call you full time.

 And a pension? Forget about it! So here you are, a freelancer, taking what work you can get, making ends meet.

This is our world now. They call it the gig economy and boy, does it make life hard.

Meanwhile, your friends who managed to get corporate jobs are talking about their 401(k)s and you're thinking, "Do freelancers even get to retire? Can we even dream about it?"

But did you know that as a freelancer, you can have retirement accounts too? You can have both 401(k)s and IRAs- and reap the sweet, sweet tax benefits of both!

Let's say it again, louder, for the folks in the back:


And you should. After all, if you don't do it, who will?

It's not like you have an employer looking after you.

Even if you don't think you can afford to save for retirement right now, you should still learn how it works.

All the acronyms can be pretty confusing, but don't worry: I'm here to break it down for you.

Retirement Savings Basics

So what are these retirement accounts everyone is talking about?

The simplest way I can put it is this:

The government is willing to bribe you to do certain things. Stop for a minute and think about all the ways the government nudges you to do certain things:

  • They discourage alcohol and cigarette use by taxing the living daylights out of them.
  • They penalize you if you don't get health insurance
  • They give you a tax deduction for paying student loan interest.
  • They give you a tax credit if you have kids.

The government wants you to save for retirement, so they are willing to bribe you a little.

They do this by creating magical bank accounts just for retirement that have better tax treatment than regular bank accounts.

These "special" accounts come in many flavors and include IRAs, 401(k)s, SEPs, and SIMPLEs. There are rules about when you can take the money out, and there are rules about how much you can put in each year.

So yes, IRAs have rules, rules, rules. But if you can learn the rules of football, you can learn the rules of IRAs.

Regular Old IRAs

IRA stands for "Individual Retirement Account".

The IRA is the original magical bank account.

All IRAs have a major benefit: Tax-Free Growth. When you invest within that account, the money can grow without the IRS grabbing at it every year like it does with a regular investment account.

If you had a non-IRA account and bought stocks and bonds, the IRS would want a cut of the money every time a stock paid a dividend, a bond paid some interest, or you sold something and had a gain.

Imagine trying to grow a tree, but someone comes in and cuts off a branch every single year! It would really hobble the growth of your tree over time. It works the same way with your money.

The tax-free growth aspect of an IRA acts like a shield and lets your money grow without the IRS coming in and cutting off a part of it every year.

IRAs have other benefits, too. Those benefits depend on how much income you make and what flavor of IRA you put money into.

IRAs come in two flavors: Roth and Traditional. You can have one of each, if you like, but you can only put a total $5500 in all your IRAs each year. Some people with a lot of income aren't allowed to contribute to the Roth kind.

With a Traditional IRA, you may be able to take an "above the line" tax deduction. This can reduce your AGI, which has some powerful effects on your taxes and what health insurance subsidies you qualify for.

(Related Reading: WTF is an AGI?)

With a Roth IRA, you don't get a deduction, but you aren't taxed on the money when you take it out. So if you aren't making a lot of money now, and you're in a low tax bracket, you might want to put it in a Roth now, and skip the taxes later when you're in a higher tax bracket!

It's like a tax cheat code... but it's very legal.

See why it pays to learn about this stuff?

Anyone with earned income can open up an IRA. You can open one if you're a freelancer, if you have a regular old corporate job, it doesn't matter.

You are only allowed to put in $5500 each year  ($6500 if you're 50 years old or older) as of 2018. The IRS adjusts this contribution limit for inflation each year, so it could be more later on!


SEP stands for "Simpified Employee Pension" plan.

It's a traditional IRA, so the money you put in might get you a tax deduction if your income isn't too high.

Unlike a regular IRA, the SEP IRA has a higher contribution limit! The amount you can put in depends on your income.

If your small business hires people other than you, you have to be fair to them and contribute the same percentage to their accounts as you to do you own. Employees cannot contribute to the accounts- it's all done from the employer.

If you're a sole proprietor, partnership, C-corp, or S-corp, you can open a SEP IRA.

You can open a SEP plan if you are self-employed or have income from freelancing.

You can still take advantage of the potential tax benefits of a SEP IRA even if you have a full-time job as an employee, if you earn money freelancing or running a small business on the side, you could take advantage of the potential tax benefits of a SEP IRA.

You can have a SEP IRA and a regular IRA at the same time!


SIMPLE stands for Savings Investment Match Plan for Employees. It's another type of IRA that employers and employees can contribute to.

SIMPLEs are similar to SEPs. SIMPLEs are for employers of under 100 people (if you're a freelancer, you probably only have one employee: yourself!).

For more differences between the SIMPLE and the SEP, check out this chart from USAA.

The Solo 401(k)

Solo 401(k)s are also called "One Participant 401(k) plans".

As a self-employed person, you can make a contribution for yourself the person, and yourself the business- because the IRS considers you both employer and employee.

You know how some people get an employer match on their 401(k)s?

You can get an employer match, too... but since you are your employer, you have to give the match to yourself. So it's not exactly free money.

But it can have a nice effect on your taxes!

Keep in mind, the solo 401(k) is a little more paperwork heavy than the other options, but don't let that scare you. They'll walk you through that at Fidelity/Vanguard/Wherever you go to open it up. If the account becomes worth more than $250,000, you have to file a form with the IRS each year too.

An Example of Some Freelancer Tax Magic

How Maria Keeps her Low Cost Health Insurance

Maria is a freelance illustrator in New York State. In 2017, she took in $40,000 of income from her clients.

Maria has a solo 401(k) and a traditional IRA. She stuffs both of them with cash, but doesn't max out her 401k.

This didn't leave Maria a lot of money to live on, but she lives very frugally.

Maria's Total Income: $40,000
Maria's Business Deductions: $4,000
Maria's Traditional Solo 401(k) Contributions: $12,000
Maria's Traditional IRA Contributions: $5,500

Let's subtract all that stuff from Maria's total income to find her AGI.

Maria's AGI is now $18,500 and she qualifies for a free or low-cost health plan in New York State. In the eyes of the IRS, she's totally poor! But this isn't cheating. It's totally legal, and Maria is only taking advantage of the same benefits that people who work traditional jobs have access to.

Maria will also have deductions for half of the payroll taxes she owes - which will lower her AGI even more.

She'll also be able to retire someday and live a comfortable lifestyle because the money she puts into her IRA and 401(k) will compound and grow tax free. She will need to pay taxes on it when she takes it out.

Make sure you're OK with not touching your contributions until age 59.5. This means that you should have an emergency fund first. If you crack open the traditional 401(k) or IRA before you're 59.5 years old, you owe taxes AND a penalty!

There are some exceptions to this. For example, Maria can withdraw up to $10,000 penalty free (she'll still have to pay taxes on it) to buy, build, or rebuild her first home. Read about more exceptions here.

If you're thinking of doing something like this, check with your accountant first. I don't know your personal situation, so it may not be right for you. I just want to illustrate for you how retirement accounts can make powerful benefits happen for freelancers!

Do you have any retirement tips or tricks for professional freelancers? Let me know in the comments!

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