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

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.

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.

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.