One of the major reasons people avoid freelance copywriting (and freelancing in general) is the lack of benefits. But the truth is, freelancers have a huge opportunity to build their benefits package the way they want—not the way their employer wants. And that includes saving for retirement as a self-employed freelancer.
When it comes to freelancers and self-employed individuals saving for retirement, you have a few options to explore.
How Self-Employed Freelancers Save for Retirement
When it comes to retirement, freelancers have some huge benefits over on-staff employees—if you know how to take advantage of those benefits!
There are several ways to save for retirement as a freelancer. Each option has ways it can reduce your taxable income (the amount you own the government in taxes). Talk to your tax prep professional to make sure you’re maximizing these benefits in a way that makes sense for you.
A self 401(k)—also sometimes referred to as a one-participant 401(k) or solo 401(k)—is a great option if you’re running your business, well, solo! Contributing to a self 401(k) is especially beneficial for freelancers who had a lucrative year for business and want to lower their taxable income.
Your contributions to your retirement account lower the amount you’re able to be taxed on. (For example, if you made $125,000 and contribute $20,000 to your retirement, your taxable income is now $105,000 versus $125,000. You may, of course, have additional deductions that lower your taxable income further.)
If you are a freelancer that has no employees (you’re a sole proprietor or a one-person LLC), you can contribute to the plan as both the employer and employee. You can also contribute to a self 401(k) plan if you hire your spouse.
As the employee, you can contribute to the 401(k) just as you would to an employer-offered 401(k) plan. The maximum amount you can contribute to the plan varies year to year ($22,500 in 2023). (If you’re over 50 years old, you may be able to make catch-up contributions. Talk with your tax pro for your specific situation.)
You must make your employee contribution by the end of the calendar year. (For example, if you want to contribute to retirement in 2023, you must do so by December 31, 2023.)
As the employer, the math is a little trickier. You can contribute 25% of “earned income,” which the IRS defines as “net earnings from self-employment after deducting both one-half of your self-employment tax, and contributions for yourself.”
This is why you have until you file taxes to make your employer contribution.
Note: When you have $250,000 or more in assets in your self 401(k) plan, you must file Form 5500-EZ each year with the IRS.
Another option is to contribute to an IRA (individual retirement arrangement or account). There are two types of IRAs: Roth and Traditional.
Roth IRA: Your ability to contribute to a Roth IRA depends on how much you earn. For 2023, you can contribute if your modified adjusted gross income (your income, minus certain allowable deductions) is less than $153,000 (or $228,000 if you’re married and filing taxes jointly). If that all sounds confusing, consult your tax prep professional! The perks of contributing to a Roth IRA is that the money is not taxed when you start withdrawing in retirement.
Traditional IRA: Anyone can contribute to a traditional IRA, regardless of how much you earn.
The perk of a traditional IRA is that you may qualify for a tax deduction in the year in which you make a contribution to the account. Traditional IRAs also assume you’re likely making more money now that you will be in retirement. So, you’ll likely be taxed at a lower rate when you begin withdrawing money in retirement.
A SEP IRA, or Simplified Employee Pension plan, allows you to contribute up to 25% of your net self-employment earnings, up to $66,000 (in 2023). Unlike a self 401(k) that allows you to contribute as the employer and employee, a SEP IRA allows you to contribute only as the employer.
Like other options, contributing to your SEP IRA reduces your taxable income (and, therefore, reduces the amount of federal income tax you owe).
Like a self 401(k), a SIMPLE IRA allows you to make contributions as both the employer and employee. You can contribute all your net earnings from self employment in the plan, up to $15,500 in 2023 (plus, catch-up contributions if you’re over 50).
However, employer contributions to a SIMPLE IRA are a bit different than a 401(k). SIMPLE IRAs require either a 2% fixed contribution or a 3% matching contribution.
Contributions are deductible.
When Should You Start Saving for Retirement When Freelancing?
As with anything when it comes to personal finances, it’s really dependent on you and your specific situation. For most freelancers, the first step is to have an emergency fund. But you may also decide to contribute to both your emergency fund and retirement simultaneously. After all, the benefits of compound interest are bigger the sooner you get started.
Start with an Emergency Fund
How much is in your emergency fund is dependent on your lifestyle. Everyone has different recurring costs (rent/mortgage, car payment, grocery bills, etc.).
A good rule of thumb is to save anywhere from three to six months worth of expenses. Some people may want to save even more—it really depends on you and your comfort level.
High-yield savings accounts are a great place to save your emergency fund. These savings accounts offer a higher interest rate than normal savings accounts, meaning you earn more interest. You want your emergency funds easily accessible, which is why putting them in a savings account makes sense. But you also want to earn as much as possible for that money sitting in the account.
Determine How Much You Want to Save for Retirement Each Month
The sooner you can start socking away money in a retirement account, the longer it has to grow. You can use this compound interest calculator to see just how much opportunity there is for your initial investment to grow the sooner you start and the longer you let it grow.
Play around with the numbers. Yes, you eventually want to nail down how much you want to contribute each month, but seeing how much more your money can grow if you invest just a little more each month may sway what number you choose.
Aim to contribute a percentage of your pre-tax earnings each month. Again, this number will depend on your situation, including how much you’re earning and your age (if you’re playing retirement catch-up), among other factors.
For example, you may aim for 15-20% if you’re starting to invest in your 30s, or 25-30% if you’re starting in your 40s. But you may also aim to contribute more if you’re able or less if your business has slowed for one reason or another. You can always adjust as needed, but it’s best to choose a number so you can automate your processes as much as possible. This way you can ensure you’re saving and don’t have to waste valuable time figuring out what you need to do each month.
Automate Your Retirement Contributions
Really—automate it! If you can automatically deposit money from one account to another consider this option. If you can’t, add a recurring calendar invite for yourself to make the deposit.
Your Turn! How are you saving as a freelancer? Share your tips in the comments below!
Note: We are not legal experts or tax preparation professionals, so always consult an accountant, tax prep professional, or attorney if you have concerns. This information is aimed at copywriters in the United States. Copywriters in other locations may find this information useful for determining what questions they need to ask and answer based on their city, country, or region.
Last Updated on June 29, 2023