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

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What we’ll cover:

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.

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 this 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. 

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 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 would 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. Multiply that number by 10-15% and make that your retirement savings target for the next six months.

Is this really 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 current age. To see 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 creative 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 an annual contribution limit of $58,000 for 2021 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 $19,500 in 2021 (if you’re 50 or older, it’s $26,000) or $20,500 in 2022 (if you're 50 or older it's $27,000)
  • As the employer you can 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: You can start withdrawing money from your solo 401(k), no questions asked, once you turn 59 ½. You also have to start making withdrawals, which the IRS calls Required Minimum Distributions (RMDs), the year you turn 72 (as of January 1, 2020) and every year afterwards. If you take money out early or don’t make required withdrawals, you could pay penalties.  

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). Nice! 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 provide recommendations about which retirement accounts you may want to consider.

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 or Simplified Employee Pension IRA

Tax Treatment

Contributions are made with post-tax dollars. Your withdrawals in retirement are tax-free, provided you comply with the withdraw 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.

Annual Contribution Limit

$6,000 for 2021 and 2022 ($7,000 for those 50 and older)

$6,000 for 2021 and 2022 ($7,000 for those 50 and older)

Employers (this can be you, the freelancer) can contribute up to $58,000 in 2021 ($61,000 for 2022) or 25% of an employee’s compensation, whichever is less.


Withdrawals of your contributions are penalty and tax free, at any age. Prior to age 59½, withdrawals from the interest and/or earnings are subject to income tax and a 10% penalty. Important: the age rule applies as long as you’ve had the Roth for at least five years. Otherwise, you’ll have to wait until you and your Roth IRA have aged in to qualify for withdrawals in general or early-withdrawal exceptions.

If you withdraw your money prior to age 59½ you’re generally subject to income tax and a 10% penalty. 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. After age 59½ you’ll be subject to income tax but no penalty.

Required Minimum Distributions (RMDs)

You are required to take RMDs in the year you turn 72. Prior to 2020, the RMD age was 70½, but due to a change in the law, that age has been raised to 72. This age increase went into effect on January 1, 2020. For individuals who turned 70½ prior to the effective date, check with the IRS to get the full details on the timing of your RMD obligations.

You have to start taking Required Minimum Distributions once you turn 72. 

Income Limits

For 2021: You cannot contribute to a Roth IRA if you’re single and your modified adjusted gross income is $140,000 or greater ($208,000 or greater if you’re married filing jointly). 

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 2021: You cannot deduct your contribution if you’re covered by a retirement plan at work, single, and your modified adjusted gross income is $76,000 or more (less than$125,000 if you’re married filing jointly).

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).

If neither you or 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.

For 2021: Contributions are tax deductible up to a certain amount. See IRS "SEP Plan FAQs" for more information. 

Age Requirements

Contribute at any age.

Contribute at any age. Prior to 2020, you could only contribute until you’re 70½, but due to a change in the law (the SECURE Act), the age limit has been eliminated.

Contribute at any age.

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

As you can see, there are a few different places you can put your retirement funds when you’re self-employed. But you don’t have to pick just one; like salaried employees, freelancers may be able to mix and match retirement accounts. 

For example, you could have an IRA and a solo 401(k). In fact, you might want to have 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 up 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 contribution limit for IRAs, which is $6,000 for 2021 and 2022 (or $7,000 if you're age 50 or older)

Confused? Let’s look at an example.

Say Sophia is the owner and sole employee of Company A, which offers a SEP IRA. Under that plan, Company A regularly contributes to Sophia’s SEP IRA – they even contribute the $58,000 maximum allowed for 2021. Remember, this is really all just Sophia’s money since it’s her company, but it’s an important distinction that it’s the business making the contributions.

Sophia also decides to contribute $3,000 to her SEP IRA this year. On top of that, she opens a Roth IRA. At this point, Sophia can only contribute $3,000 to her Roth IRA, bringing her total individual contributions up to the $6,000 maximum. 

Any additional retirement options for freelancers?

IRAs and a freelancer 401(k) could 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 a robo-advisor and/or trading individual stocks, bonds and ETFs

For added insights about saving for retirement, consider talking with your salaried friends as well as your network of self-employed professionals to see what they’re up to.

Combined with information from your financial advisor, you’re on your way to creating a retirement plan that works for you now and that you can refine over time.  

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