Retirement Options for Freelancers | The Reynolds Center


Freelancing has its perks, including freedom. One downside is the missed opportunity to participate in a company pension plan that matches your contributions. But if you’re worried about working into 90, don’t worry. There are many vehicles that allow freelancers and other freelancers to contribute to their online accounts. The best part is that these accounts are easy to open through many major brokerage firms and banks, and there are many investment funds you can choose to invest your contributions into.

Here are some retirement options for freelancers:

Traditional Individual Retirement Plan or Roth (IRA)

An IRA is generally the most flexible and easiest retirement account to set up for the self-employed and other self-employed people.

The contribution limit is $6,000 for 2022 and $7,000 if you are 50 or older. With your contributions, you can distribute them among the different investment funds offered by your institution.

One of the differences between a Traditional IRA and a Roth IRA is how they are taxed. With a traditional IRA, you may get a tax deduction on your contributions as an income adjustment on your tax return, but it will be taxed when you withdraw the money. With a Roth, no tax deductions are allowed, but withdrawals are tax-free. Note that withdrawals before age 59 ½ may be subject to a 10% penalty.

Single Participant 401(k)

Also known as a solo or individual 401(k) plan, this is the standard 401(k) plan offered by companies to their employees, but is for self-employed individuals without employees.

For 2022, you can contribute up to 100% of your earned income up to the total contribution limit of $61,000, with a catch-up contribution of $6,500 for those age 50 or older.

A single-participant 401(k) is also a good option if you’re maximizing your contributions for an IRA and want to make even more contributions.

Do you have an urgent expense and cannot find the funds? You can take out a loan on your 401(k) for up to $50,000 or 50% of the total cash value. You cannot borrow from IRAs.

Simplified Employee Retirement Plan (SEP) IRA

A SEP IRA has the same contribution limit as a single participant 401(k). It allows a contribution of up to 25% of your income up to a total of $61,000 in 2022. However, unlike IRA and 401(k) plans, catch-up contributions are not allowed.

One thing to note is that early withdrawals from these accounts before age 59.5 could be subject to a 10% early withdrawal penalty in addition to any tax for distribution.

Choose your investments

Now that your account is open, here’s the fun (or stressful) part. Choose where to invest your money. Some accounts allow you to choose between stocks, ETFs and mutual funds. It’s also important to consider asset allocation: what you should invest in stocks versus bonds. What you invest in depends on your risk tolerance, your goals and the number of years until retirement. As a general rule, the younger you are, the riskier your investments can be, as you have enough time to ride out market downturns. The closer you get to retirement, the more careful you need to be to preserve what you have while receiving interest and potential dividends.

Still nervous and can’t choose? Fortunately, there are target date funds based on which fund managers periodically adjust the underlying investments to become more conservative as the target date approaches. So if you plan to retire around 2055, choose a target fund around the year.

Opening an account

Opening a single participant IRA or 401(k) plan is a simple process that can be done online. You can open one through financial institutions large and small, and there are many resources and articles online that can help you compare institutions.

The steps are simple. Once you’ve selected your institution, choose the type of account you want. Enter your personal information, select the type of investment you want, and set up your direct deposit information to start contributing.

Consult a professional

As with anything tax-related, consult a tax professional. You can also discuss with a financial advisor which type of account would best suit you and your retirement goals. The best place to start your retirement plan search, including updates on contribution limits, taxes, forms and other resources, is at Internal revenue service.


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