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Top 3 Retirement Savings Options for Freelancers

As a freelancer, it can be easy to live from project to project and put off retirement savings for another day. But without the built-in savings mechanism that is the employer-sponsored 401(k), you’ll need to take responsibility for your savings trajectory. That’s where these three options come in. 

1. The Roth IRA

The Roth IRA is the only option on this list that lets you save after-tax income and withdraw it tax free in retirement. It’s an especially good option for people who expect to be in a higher tax bracket in retirement than they are now. As long as your income is within IRS limits, you can contribute up to $5,500 each year. If you’re just starting your freelancing career or if you’re freelancing between other gigs, consider opening a Roth. You don’t have to stick with a Roth forever. If you end up opening a Traditional IRA or 401(k) once business picks up, you’ll be in a good position in retirement. That’s because you’ll have a mix of taxed and un-taxed accounts to draw from.

2. The SEP IRA

A Simplified Employee Pension (SEP) IRA is a good option for freelancers and small business owners alike. Your savings grow tax tax-deferred, and you don’t have to contribute the same amount each year. The contribution limits are more generous than they are for the Roth IRA, so if you’re raking in the dough, consider a SEP IRA.  Each year you can contribute up to the lesser of either 25% of your net earnings from self-employment or $52,000. As with a regular IRA, contributions to a SEP IRA reduce your taxable income – useful if you’re doing well now.

3. The Solo 401(k)

A one-person 401(k) is also known as a Solo 401(k), Uni-k, Individual 401(k) or One-Participant k. Whatever name you choose, you’ll get to contribute as both an employer and an employee. Confusing, right? The IRS’s logic is that every business owner is both a boss and a worker, and so should have separate contribution limits for each role. Unlike the “simplified” SEP-IRA, Solo 401(k)s require more paperwork to set up. Plus, you’ll have to file a special form with the IRS (Form 5500-EZ) once your holdings top $250,000.

The Takeaway

Whichever of these three options you choose, it’s a good idea to look for plans with low fees. That way, you’ll keep more of your investment gains. Of course, you can save for retirement in other retirement vehicles, and in taxable accounts, too. In fact, as far as we’re concerned, the more you save for retirement the better.

Photo credit: flickr

Amelia Josephson Amelia Josephson is a writer passionate about covering financial literacy topics. Her areas of expertise include retirement and home buying. Amelia's work has appeared across the web, including on AOL, CBS News and The Simple Dollar. She holds degrees from Columbia and Oxford. Originally from Alaska, Amelia now calls Brooklyn home.
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