Freelancer 401(k)

When you leave your full-time job to be a freelancer, you leave behind significant perks, including an employer-sponsored retirement plan. Since you won't benefit from an employer-provided retirement plan, you must figure out how to save for retirement on your own. Fortunately, several retirement planning options can help you secure a comfortable future.

One of the benefit retirement account options available to freelancers and independent contractors is the 401(k) for 1099 earners, which allows members to contribute up to $61,000 in 2024. This account offers flexibility, including access to your retirement savings at any time without incurring taxes or penalties, making it an attractive option for freelancers with fluctuating incomes. 

Retirement saving challenges for freelancers

While freelancing offers greater flexibility, it comes with various challenges.

One of these challenges is saving for retirement. While employees working traditional jobs get access to employer-sponsored plans like 401(k) and 403(b), freelancers must figure out how to build a comfortable retirement. If you are in this situation, you may have various retirement savings options, including a 401(k) for 1099 earners.

Without a predictable income, it becomes difficult for freelancers to set aside a fixed amount each month, especially during periods of low income. Unlike traditional employees who benefit from automatic payroll deductions that go into retirement accounts, freelancers must manually transfer their retirement savings into their retirement accounts.

Additionally, freelancers may not have access to financial advice as traditional employees. Usually, employers may help employees access timely financial advice through the benefits departments or external experts. Freelancers may have to pay to access financial advice, and they may struggle to choose retirement plans and investment options.

Retirement planning options for freelancers

If you work as an independent contractor in the gig economy, you may have several retirement savings options.

401(k) for 1099 earners

Beagle offers a specialized 401(k) plan designed for 1099 earners such as freelancers. This plan is designed for people with self-employment income, allowing them to contribute both as an employee and employer. For 2024, you can contribute up to $61,000 to the 401(k), a significant amount compared to other retirement accounts like traditional IRAs.

One of the benefits of Beagle's 401(k) for 1099 earners is the flexibility it offers freelancers; you can access your retirement savings at any time without the usual income taxes and penalties that come with early withdrawals, often withdrawals made before age 59 ½. Since freelancers may have unpredictable income streams, this flexibility allows them to tap into their retirement savings occasionally.

Traditional IRA or Roth IRA

An Individual Retirement Account (IRA) is one of the simplest retirement accounts that freelancers and independent contractors can open to start saving for retirement. IRAs do not have special filing requirements, and anyone with earned income can open an account. You may have to choose between a traditional IRA and a Roth IRA since each IRA offers unique tax benefits.

Contributions to a traditional IRA are made with pre-tax dollars, and your money will grow tax-deferred until you withdraw it in retirement. On the other hand, contributions to a Roth IRA are made with after-tax dollars, and withdrawals taken in retirement will be tax-free as long as you meet certain requirements. For 2024, contributions to a traditional IRA and Roth IRA are capped at $7,000, or $8,000 if you are age 50 or older.

Solo 401k

A solo 401(k) is designed for business owners without employees, except a spouse, and it offers the same tax advantages as a traditional 401(k). If you work with your spouse in the freelance business, he/she must receive an income from the business to qualify for contributions.

A solo 401(k) allows you to contribute both as an employee and employer. For 2024, you can contribute a total of $69,000, or $76,500 if you are age 50 or older. Except in a few situations, you won’t be allowed to take distributions from a solo 401(k) before age 59 ½. You must pay income taxes and penalties on solo 401(k) distributions taken before age 59 ½. 

SEP IRA

If you earn an income from freelancing, you can open and contribute to a SEP IRA. This retirement account is ideal for self-employed individuals or small business owners with few or no employees.

If you have eligible employees, you must set up retirement accounts for them and make an equal percentage contribution for each employee, including yourself. So, if you decide to contribute 12% of your salary for yourself, you must contribute 12% of each employee’s salary.

Contributions to a SEP IRA cannot exceed the lesser of $69,000 in 2024, or 25% of their compensation, with a $345,000 limit on compensation per employee that can be used to determine the contribution. With a SEP IRA, the earnings grow tax-deferred, and the contributions are tax-deductible.

Tips for saving for retirement as a freelancer

Savings for retirement as a retirement can be a challenge when working for yourself. Here are some tips to help freelancers build a comfortable retirement.

Open a retirement account.

If you have not started saving for retirement, open a retirement account today to start your retirement savings journey. A good retirement account to consider is a 401(k) for 1099 earners, which lets you contribute up to $61,000 in 2024, and still access your money at any time without paying taxes or penalties.

Set up automatic savings

If you want to ensure consistency when saving for retirement, set up automatic contributions to your retirement account, even if the amount is small. Also, since freelance incomes are unpredictable, you can set up a percentage-based contribution rate instead of a fixed amount.

Adjust contributions regularly

If you have specific periods of high income, you should increase the retirement contributions to compensate for low-income months. You should review your contributions periodically to ensure you are on track with your retirement goals.

Plan for healthcare costs

Medical expenses are one of the significant costs in retirement, and it helps to start saving for these costs early. If you are eligible for a health savings account (HSA), you can save for medical expenses in retirement and enjoy tax advantages. Contributions to an HSA are tax-deductible, and you can take tax-free qualified withdrawals in retirement.