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How to Save for Retirement When You’re Self-Employed

April 20, 2023

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What we’ll cover:

How much to save for retirement
401(k) for freelancers or independent contractors
Independent contractor IRAs

Whether you call yourself self-employed, an independent contractor, freelancer, desk-hopper or just leave the job description as being your own boss, you’ve probably got a good hustle going to keep your business moving.

But beyond plotting how to land your next client or expand your business, how far into the future do your plans take you?

Are you, by any chance, saving for retirement?

Whether you work for yourself or not, saving for retirement may feel challenging. But when you’re self-employed you may run into some other speedbumps like unpredictable income or uncertainty about which retirement account (or accounts, plural) to pick.

So where do you start? Is there such a thing as an independent contractor retirement plan (or a way to create one?).

The short answer is yes, and this guide could help you lay the groundwork for your self-employed retirement plan, highlighting saving options for freelancers to consider.

How much should freelancers be saving for retirement?

Before jumping into the different retirement accounts independent contractors may want to consider, let’s talk numbers.

To get started, we need to slightly modify a guideline about saving 10 to 15% of your income for retirement. For salaried employees (folks who receive regular, predictable paychecks) the math could be pretty straightforward. They just need to look at a paycheck, pick a percentage between 10 and 15, and that’s it! They have a retirement savings target to meet every time money rolls in.

But when you’re self-employed, how much you earn and when you get paid can fluctuate. With a simple tweak, this same retirement savings guideline that works for salaried employees could work for independent contractors: Consider saving 10% to 15% of what you earn per year instead of per paycheck.

This way you can figure out your annual retirement savings target and chip away at it. Since you’ll know what number you’re aiming for, you could consider increasing your percentage when cash flow perks up. This could also help you compensate for leaner times and even get ahead just in case work tapers off.

If you need help figuring out an appropriate savings target for your retirement goals, you may want to consult with a financial advisor who could crunch the numbers for you.

Some ways you could figure out much to save in retirement accounts every year

If you’re on track to make about the same amount as you did last year, pull out your tax return and check out your adjusted gross income. This is how much you netted after deductions and other approved adjustments. It’s also the number you can use to calculate your 10-15% retirement savings target.

For example, if your adjusted gross income was $100,000, your target might be to save somewhere between $10,000 and $15,000 for the year. No matter how you decide to break that up – whether you put away a set amount once a month or just send funds bit by bit as you get paid – at least you’ll have a concrete number to aim for.

You could also pull up six months of paystubs and estimate what you netted after sending in half the year’s estimated taxes. You can consider multiplying that number by 10-15% and making that your retirement savings target for the next six months.

Is this really what all freelancers should be saving for retirement?

The 10% to 15% guideline can be a good starting point and provide some structure. But how much you may need to save for retirement depends on a variety of things such as your age. To help you consider how much you may want to save overall, plug in some numbers in our retirement calculator.

Good to know: If you don’t already have a budget in place, you could create one and see how saving for retirement fits in to it. New to budgeting? We’ve got you covered with some budgeting strategies to try.

A 401(k) for independent contractors

It would make sense if you thought only salaried employees could have 401(k)s, but freelancers can have them too.

If you’re self-employed, you can open a solo 401(k), which has a total annual contribution limit of $66,000 for 2023 or $61,000 for 2022 (not including catch-up contributions).

This type of retirement account sees freelancers as having two roles – as an employee and as an employer – and each has different rules for contributions:

As the employee you can contribute $22,500 in 2023 (if you’re 50 or older, it’s $30,000) or $20,500 in 2022 (if you're 50 or older it's $27,000)
As the employer you can generally contribute up to 25% of compensation. The IRS walks you through how to do the calculation.

Figuring out these numbers can take a little bit of effort. Don’t hesitate to reach out to a tax professional if you need some help.

Good to know: 401(k)s are subject to required minimum distribution ("RMD") rules. Visit the IRS website for details.

You can have an independent contractor 401(k) and a company 401(k)?

If you’ve got steady pay that includes a 401(k) benefit and you’re also freelancing, you could end up with both a 401(k) and a solo 401(k). If that’s you, keep an eye on how much you’re contributing as an employee because the contribution limit mentioned above applies to all 401(k)s you may have.

Traditional IRA, Roth IRA and/or a SEP IRA for independent contractors

As a freelancer, you could also consider socking away funds in an IRA (Individual Retirement Account).

There’s more than one type of IRA, but they share some general features, such as annual contribution limits, when you can take money out without risking a penalty and if withdrawals are taxed.

A financial advisor may be able ot help you consider which retirement accounts you may want to choose.

In the meantime, let’s go over three types of IRAs – Traditional, Roth and SEPs – that independent contractors may be able to benefit from.

Roth IRA

Traditional IRA

SEP IRA

Roth IRA

Traditional IRA

SEP IRA

Tax Treatment

Contributions are made with post-tax dollars. Your withdrawals in retirement are tax-free, provided you comply with the withdrawal requirements (see below).

Contributions are made with pre-tax dollars and grow tax-deferred until you make withdrawals, which are taxed as income.

Contributions may be tax deductible today, depending on income and any work-related retirement plan.

Special rules apply when figuring out your maximum deductible tax contribution when you are self-employed.

Visit the IRS for more details.

Annual Contribution Limit

$6,000 for 2022 ($7,000 for those 50 and older). $6,500 for 2023 ($7,500 for those age 50 or older).

Employers (this may be you, the freelancer) can contribute up to $66,000 for 2023 ($61,000 for 2022) or 25% of an employee’s compensation, whichever is less.

Withdrawals

Withdrawals of your contributions are penalty- and tax-free, at any age.

Withdrawals of earnings prior to age 59½ (or before the account is 5 years old) are generally subject to income tax unless it's a qualified distribution and to a 10% early withdrawal penalty unless you qualify for an exception.

If you withdraw your money prior to age 59½ you’re generally subject to income tax and a 10% penalty (see IRS rules for more details).

After age 59½ you are subject to income tax but no penalty.

If you withdraw your money prior to age 59½ you’re generally subject to income tax and a 10% penalty (see IRS rules for more details).

After age 59½ you’ll be subject to income tax but no penalty.

Required Minimum Distributions (RMDs)

No RMDs if you're the original owner of the account.

Required minimum distributions (RMDs) are withdrawals that you must make from Traditional IRAs starting at age 73 (or age 72 if you turned 72 on or before December 31, 2022). RMDs are required by the IRS, and failure to take RMDs may result in penalties.

Visit the IRS for more information.

SEP IRAs follow the same rules as Traditional IRAs.

RMDs are withdrawals that you must make from SEP IRAs starting at age 73 (or age 72 if you turned 72 on or before December 31, 2022). RMDs are required by the IRS, and failure to take RMDs may result in penalties.

Visit the IRS for more information.

Income Limits

For 2022: You cannot contribute to a Roth IRA if you’re single and your modified adjusted gross income is $144,000 or greater ($214,000 or greater if you’re married filing jointly).

For 2023: You cannot contribute to a Roth IRA if you’re single and your modified adjusted gross income is $153,000 or greater (or $228,000 or greater if you’re married filing jointly).

Visit the IRS for more details.

For 2022: If you’re single, you cannot deduct your contribution if you’re covered by a retirement plan at work and your modified adjusted gross income is $78,000 or more ($129,000 or more if you’re married filing jointly).

For 2023: If you’re single, you cannot deduct your contribution if you’re covered by a retirement plan at work and your modified adjusted gross income is $83,000 or more ($136,00 or more if you’re married filing jointly).

If neither you nor your spouse are covered by retirement plans at work, you can deduct the full amount up to the contribution limit.

Your deductions may be reduced at other income levels or depending on your filing status. Visit the IRS webpage for more information.

Contributions are tax deductible up to a certain amount.

See IRS "SEP Plan FAQs" for more information.

Who can contribute

You can contribute if you have taxable employment income and can meet certain criteria regarding your income and tax filing status.

You can contribute if you have taxable employment income.

You can contribute if you’re self-employed.

Visit the IRS for more information on who can participate in a SEP IRA.

Independent contractors can have more than one kind of IRA and 401(k)

As you can see, there are a few places you can put your retirement funds when you’re self-employed. But you don’t have to pick just one: Freelancers can mix and match retirement accounts (salaried employees may be able to do this too).

For example, you could have an IRA and a solo 401(k). In fact, you might want to consider an IRA in addition to your 401(k.)

You may also be able to contribute to the trifecta: a Traditional, Roth and SEP IRA. It could work like this: Even though your employer must contribute to your SEP IRA, you may also be able to contribute.

Alternatively, you could open a separate Roth or Traditional IRA and contribute your own money that way. Just keep in mind that whatever individual contributions you make cannot exceed the total annual contribution limit for IRAs.

Visit the IRS’s “SEP Plan FAQs” for more details.

Any additional retirement options for freelancers?

Both IRAs and a freelancer 401(k) both designed to help you save for retirement, but they aren’t the only options out there.

Your retirement playbook could also include certificates of deposit and savings accounts as well as investing with an advisor or robo-advisor and/or trading individual stocks, bonds, and ETFs.

For added insights about saving for retirement, consider talking with your network of self-employed professionals as well as your salaried friends to see what they’re up to. Combined with information from your financial advisor, you can be on your way to creating a retirement plan that works for you now and that you can refine over time.

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