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- I stopped making my retirement a priority when I started freelancing, but I've gotten back on track.
- I looked into several options like a solo 401(k), and I decided on an IRA, a SEP IRA, and an HSA.
- I set aside about 30% of my earnings in a separate account so that I'm ready to pay my taxes.
I've been a freelance writer and editor for more than five years, and it has its perks. I can work from anywhere, choose my clients, and only write about things that interest me. But with it come a few downfalls. While it's been a fairly lucrative career path, it hasn't been great for my retirement. That's because, without an automatic contribution to a 401(k) and an employer match, I haven't made it a priority.
But with a few tips, a lot of legwork, and some serious commitment to saving, I've been able to get my retirement back on track as a freelancer. Here's how I got my retirement back on track.
1. Take initiative
The number one thing I did to get my retirement back on track was take matters into my own hands. Since I didn't have access to a company-sponsored 401(k) with a company match, I needed to do the legwork myself, both when choosing a plan and deciding how to contribute to it.
After researching my options, reviewing our budget, and talking to my financial advisor, I finally settled on the retirement savings options that worked best for me — a regular IRA and a SEP IRA, plus using our family HSA as a supplemental account.
The most important thing I did was set up automatic contributions. Similar to how you'd have your 401(k) contributions automatically withdrawn from your pre-tax earnings each month, I have my IRAs automatically debited from my account as well. The good news is that like 401(k) contributions, the money you put into your IRA is also pre-tax.
2. Learn my options
You may think that as a self-employed person, your retirement savings options are limited. But that's simply not the case. Here are a few options:
Traditional or Roth IRA: Contribute pre-tax dollars to either one of these retirement savings accounts and watch your savings grow. However, there are a few notable differences between these two IRAs. Roth IRAs have an income cap of $153,000 for individuals and $218,000 for married people filing jointly, and contributions are made with post-tax dollars. Traditional IRAs allow pre-tax contributions, which reduces your taxable income. It's worth noting that in 2023, your IRA contributions can't exceed $6,500 ($7,500 if you're age 50 or older).
SEP IRA: While it offers many of the same tax benefits as a traditional or Roth IRA, a SEP IRA is great for those who plan to make a career out of freelancing. That's because the annual contribution limits are much higher — either 25% of your earnings or $66,000, whichever is less.
HSA: While not a retirement-specific account, Health Savings Accounts are often used as supplemental retirement savings vehicles, since they allow for tax-free growth and roll over year-to-year. I use our family HSA as a supplemental retirement account.
Solo 401(k): If you're a business owner with no employees, you might consider a Solo 401(k). Contributions are made pre-tax, and the limits are a bit higher, at $66,000 annually. You just need an employer identification number, (EIN) to qualify.
3. Get aggressive
Since I didn't have a 401(k) with that coveted employer match, I had to get aggressive with my savings strategy. My husband and I even prioritize my retirement savings over contributing to our kids' 529 college savings plans. A wise financial advisor once told us, ‘You can borrow for college, but you can't borrow for retirement.'
We also tightened up our budget, so we could free up some cash to throw at my retirement. Nothing makes you get serious about retirement faster than realizing you're almost 40, am I right?
4. Consider taxes
After my first lucrative year as a freelancer, I was hit with a nearly $14,000 tax bill the following April. It was a shock, to say the least. That's why I've never let my tax bill fall through the cracks again.
Each quarter, I'll put aside money to cover the bill, an estimated 30% of my earnings, though you can also use last year's earnings to estimate the total owed. While some freelancers pay their taxes quarterly, I prefer to keep my funds in a separate bank account and pay the full amount each Tax Day.
So what do your taxes have to do with saving for retirement as a freelancer? The likelihood that you'll owe a tax bill each year is pretty high, so it makes sense to factor your tax bill into your budget, especially when calculating how much you can afford to put aside for retirement.
5. Remember my emergency fund
This may not seem related to retirement, but when it comes to budgeting, it's all connected. Plus, having a solid emergency fund is a must for freelancers. Our income is “bumpy,” or tends to fluctuate based on the time of year, number of clients, and amount of work.
So it can be easy to dip into your retirement fund (and pay the tax penalty) for unexpected expenses. That's why experts suggest that freelancers have at least six months of living expenses in a relatively liquid account, whether a high-yield savings account, money market account, or a short-term CD.