Retirement savings options for freelancers

By: Kimberly Lankford

If you’re self-employed, you don’t get the benefit of a 401(k) or other retirement-savings plan set up by your employer, which makes it easy to save automatically from each paycheck. But you do have access to several other options for retirement savings that can reduce your taxable income and grow tax-deferred for retirement. You just need to take the time to open the account and contribute the money yourself.

If you earned any freelance income in 2019 — even if it’s just on the side in addition to your full-time job — you still have time to improve your tax situation by contributing to one of these accounts. Here are some retirement-savings options for freelancers:

Simplified Employee Pension (SEP). This is the simplest retirement-savings option for freelancers and other self-employed people. You can set up the account with most brokerage firms, banks or mutual fund companies that offer IRAs, and you generally have the same range of investing options. Your contributions reduce your self-employed income and grow tax-deferred until you withdraw the money in retirement.

If you have a full-time job in addition to freelance earnings, you can still contribute to a SEP even if you’re contributing the maximum to a 401(k) at work.

You can invest up to 20% of your net self-employment income (which is your business income minus half your self-employment tax), up to $56,000 in 2019. You have until April 15, 2020, to contribute to a SEP for 2019. See IRS Publication 560 Retirement Plans for Small Business for more information about SEPs and other retirement accounts for self-employed people.

Solo 401(k). If you earn just a few thousand dollars from freelance work, you’ll be able to contribute much more to a solo 401(k) than you can to a SEP because of the way the contribution limits are calculated. Since you’re self-employed, you’re considered both the employer and the employee for solo 401(k) contributions. As the employee, you can contribute up to $19,000 to the account in 2019 (or up to $25,000 if you’re 50 or older), even if that is all of your self-employed income for the year. You can also contribute up to 20% of your net self-employment income as an employer, up to a maximum of $56,000 for 2019 (or $62,000 if 50 or older) for both types of contributions combined.

If you have a full-time job in addition to freelance work and you already contribute to a 401(k), you may not be able to contribute as much to your solo 401(k) — your other 401(k) contributions reduce the $19,000 limit as an employee, but you’ll still be able to contribute up to 20% of your net self-employment income up to $56,000.

Not as many brokerage firms and mutual fund companies offer solo 401(k)s, but the number is growing. Compare fees and investing choices when choosing a plan. Your solo 401(k) contributions are generally tax-deductible and then grow tax-deferred until you withdraw the money in retirement. However, some plan administrators also give you the option to make Roth solo 401(k) contributions — in that case, your contributions don’t reduce your taxable income now, but can be withdrawn tax-free in retirement. You can only make Roth contributions to the employee portion (up to the $19,000 or $25,000) not to the 20% of net self-employment income.

You have to set up your solo 401(k) by December 31, but then you have until April 15, 2020, to make your contributions for 2019.

Individual Retirement Arrangement (IRA). Even if you contribute to a SEP or a solo 401(k) as a self-employed person, you can also contribute to an IRA. If your modified adjusted gross income — from freelance work as well as any other employment — is less than $137,000 if you’re single, or $203,000 if married filing jointly, then you can contribute to a Roth IRA. You can contribute up to $6,000 in 2019 (or up to $7,000 if you’re 50 or older) and the amount starts to phase out if your modified adjusted gross income is more than $122,000 if single or $193,000 if married filing jointly.

Your contributions to a Roth IRA aren’t tax-deductible, but you can withdraw the money tax-free after age 59 ½, as long as you’ve had a Roth for at least a five-year period. You can withdraw your contributions without penalties or taxes at any age, making this a good option if you worry that you might need to access some of the money before retirement.

You have until April 15, 2020, to contribute to an IRA for 2019. See IRS Publication 590 for more information about IRAs.

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