The number of freelancers over the last decade has increased significantly around the world. After all, working for yourself is a pretty big perk.
Though many have good intentions when it comes to preparing for the older years, in reality, many freelancers do not save for retirement. Not because they don’t want to, but because most feel they either can’t afford to or simply just don’t know how to.
With freelancers accounting for 34% of the U.S. workforce (or 53million people) this is something that needs to change. Saving for retirement is one of the best financial decisions you can make for future you.
Here are some great ways you can begin investing in a solid retirement for yourself.
If you are a brand new freelancer coming out of a corporate position, it can be worrisome not knowing what to do with your old employer-sponsored 401(k). Luckily, you can transfer it over to a Rollover IRA, which isn’t much different from a Traditional IRA, other than this; you will avoid any tax penalty that would hit you if you tried to transfer these contributions into ANY other retirement account.
This is a retirement account that anyone has the opportunity to take advantage of. It is similar to a 401(k) plan employers provide to their workers. This is because your contributions are tax-deferred, meaning you will not be taxed in the year that you make these contributions, but instead you will be taxed when you make withdrawals in retirement. For those younger than 50-years-old, the contribution limit is $5,500, while for people over 50, the limit is $6,500.
When you make contributions to Roth IRA, it is taxed the same year contributions are made, and certain qualified withdrawals can even be tax-free. Meaning; your account grows tax-free too. The contribution limits are the same as a Traditional IRA, and there is an income cap associated with the Roth IRA.
AKA: Simplified Employee Pension Individual Retirement Account. This account is similar to both Traditional and Roth IRA’s but has a higher contribution cap. You can put in 25% of your net income, or up to $53,000, depending on which is lower. Just like a Traditional IRA, these contributions are tax-deferred, saving you a lot when it comes to income taxes. For this plan, though, you are only eligible if you have some 1099 income.
This acronym stands for Savings Incentive Match Plan for Employees. Like several other plans, this one is similar to a Traditional IRA as it is tax-deferred but has a much larger contribution cap. Your contributions to this plan are restricted to $12,500. The program can be set up by a self-employed individual, or by an employer. If a freelancer someday has employees to set up on a SIMPLE IRA, they must contribute at the very least, 3%, but these are tax-deductible.
This program is unique in that it allows you to act as both employee AND employer, giving you the freedom to contribute even more to your future. This plan is only for the self-employed, you will not qualify as someone else’s employee.
Certain Solo 401(k) plans give you the option to take loans from your savings, not unlike a traditional 401(k). The contribution cap sits at $17,500, plus up to 20% of net income, maxing out at $51,000. For folks over age 50, the annual contribution cap sits at $24,000, though for those under 50, the limit is $18,000 annually. You are also allowed a 25% contribution of business profits, called “profit-sharing.”
This program requires a whole lot of paperwork, and you may need to seek out a professional to help you. A Keogh is only available to someone self-employed, who do not own an incorporated business. It could be worthwhile for a high-earning freelancer considering it has the greatest annual contribution cap of all plans.
15% of your annual income is a good amount to start contributing regularly to your retirement plan. Start by talking to a professional to find out which plan is right for you, and how you can take action now, to create a better future for yourself.
Take some time to do your homework when it comes to choosing a retirement professional, as some are better than others. Retirement savings, is, of course, one of the smartest financial decisions you can make. With the myth de-bunked that freelancers can’t put away for their golden years, hopefully, there will be a rise in retirement savings.