Episode 27 - Teal: Lia Zneimer's mission to turn 500,000 users into customers
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When you freelance, you're responsible for planning your own retirement. You don't have the benefit of an employer-provided retirement account, so you have to set up a financial system that will support you in the long term.
But you're not out of luck. A variety of freelance retirement options are available to help you secure a comfortable future and enjoy your retirement years.
Deciding what "comfortable" looks like is the first step in freelance retirement planning. Think about:
Your choices determine how much you'll need to save by the time you reach your desired retirement age. Other factors—like Social Security benefits and how many years you expect to live after you retire—also affect savings requirements.
Another significant variable impacts your ability to save for retirement as a freelancer: irregular income. In a salaried job, you simply designate a set part of each paycheck for retirement savings and don't have to think much about it. But it's harder to be consistent with contributions when your income fluctuates from month to month.
Expenses like business insurance, health insurance, and self-employment tax also affect how much you can save for retirement. Self-employed workers pay 15.3% in Social Security and Medicare taxes—twice what you'd pay as a traditional employee because you also have to cover the employer's portion.
After factoring in the complexities of freelance income, what's left can fund a retirement account that earns returns and grows your investment.
Most accounts limit how much you can contribute per year, although some allow additional contributions after you reach age 50. Check IRS documentation to find limits for the current tax year and determine which option is best for you.
If you pay yourself a salary, you can set up a one-participant 401(k)—also called a solo, individual, or uni-401(k)—and defer a set annual amount of your pay. Contributions are typically made on a pre-tax basis, but you can set up a solo Roth 401(k) if you want to contribute after taxes. Roth accounts offer the benefit of withdrawing money tax-free once you retire.
Since you count as both employee and employer when you freelance, you're allowed to make the same contributions an employer would make to a traditional 401(k) in addition to your salary deferrals. This gives you a higher contribution limit than a traditional employee, which means you can save more every year.
A SEP IRA can be a good choice when your freelance income varies significantly throughout the year. You can contribute as much as 25% of net annual earnings up to the IRS limit, but you can wait until you file your taxes and make a lump sum contribution instead of contributing throughout the year. If you have a 401(k) from a company you worked for before you switched to freelancing, you have the option to roll the savings over into your IRA.
Be aware that, if you hire help for your freelance business, you must also make SEP-IRA contributions for eligible employees. These contributions must match the percentage of compensation you contribute for yourself.
With a SIMPLE-IRA, you can save all your net freelance earnings every year up to the IRS limit. Employees may also pay into to this type of plan, and you can choose to make either 2% fixed or 3% matching employer contributions to their retirement savings.
A Keogh plan offers less flexibility than other freelance retirement plans and is only available for sole proprietorships and LLCs. On this plan, you contribute a fixed amount regularly throughout the year, up to 25% of your compensation. This works best if most of your work comes from long-term contracts or retainers that give you a more predictable income.
A retirement plan should be just one of many buckets where you set aside money for the future. Diversifying your approach allows you enjoy returns at various risk levels while protecting your savings should one of your investments lose its value.
Other freelance retirement savings options include:
In addition to these longer-term investments, it's important to have accounts with more liquidity for quick access to cash in case of an emergency. A traditional or high-yield savings account offers this liquidity while still accruing interest.
Before starting any kind of retirement account or investment plan, you have to consider some key questions:
Use these online tools to make financial estimates for savings and planning:
For help starting your freelance retirement plan, establishing a retirement account, and choosing additional investment options, look for a certified financial planner in your area. Someone with experience working with freelancers is a plus; they'll understand your unique financial situation and be able to direct you to the best options.
Fluctuations in freelance income can make retirement savings a challenge, but you can still have a comfortable retirement if you choose an appropriate retirement account and diversify your investments. Align your plan with your goals to find the best retirement account for your future.
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Theresa is the Chief Nerd at the Modern Health Nerd. You can connect with her on LinkedIn.
