Retirement Advice for Freelancers

Savings plans for the self-employed.

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Going it alone isn't easy. Ask any freelancer. The stability that comes from a steady paycheck is just one of the perks that intrepid self-employed workers forgo in the name of flexibility and freedom. They also give up on access to the tried-and-true retirement savings infrastructure that's built into most big companies, including pensions, profit sharing, and 401(k) matching plans. There are, however, plenty of options for go-it-alone types who are looking to keep their savings on track, including a variety of individual retirement accounts, 401(k) plans, and even a version of that corporate stalwart—the pension. With a little research, there's no reason the freelance life can't conclude with a well-earned retirement.

IRAs and Roth IRAs. In some ways, these common savings vehicles can be many freelancers' best friend, especially for savers who are just starting out on the long road to retirement. Cheap and flexible, the IRA is still a top option for workers looking to put away a little extra every year. For 2009, contribution limits are $5,000 a year, plus an extra thousand if you're over 50. If you're a short-term freelancer or someone who's been newly (ahem) freelanced by the recession, using these time-tested vehicles makes sense. Choosing between a Roth and a traditional IRA depends on your tax situation, so you should rely on the help of a financial professional. (That goes for other choices on this list, too.) Income limits apply as well. If you're self-employed, your income must fall below $55,000 to make the maximum contribution or below $65,000 a year to make any contribution for a traditional IRA. Limits for married filing jointly range from $89,000 to $109,000. Roth limits are higher: $105,000 to $120,000 for singles and $166,000 to $176,000 for married filers.


Who should consider it ? Freelancers who are putting away a little at a time. [See Should You Save for College or Retirement?]

SEP-IRA. The simplified employee pension, or SEP, allows self-employed folks to put away a larger chunk of cash. This year, freelancers using SEP-IRAs can sock away up to $49,000 or up to 20 percent of their net income. (The limit is 25 percent of net income if you're an employee of your own company.) There's no minimum annual contribution, so if you're in for a lean year, contributions can be lowered accordingly. It's also a good option for established self-employed workers who team up with their spouse. For example, a dentist and a spouse (who works for him or her as an assistant or receptionist) can shelter up to $49,000 each. The tax benefits and restrictions are generally the same as a regular IRA's, with payouts taxed as ordinary income after age 59½. (The penalties for early withdrawal are similar as well.) Also, if your freelance work is taking off and you're considering hiring employees, SEP-IRAs can cover them as well, although other options like Simple IRAs, which allow lower contributions by the employer, might make more sense over the long haul.


Who should consider it ? Self-employed folks looking for a low-cost retirement plan with high contribution limits. Solo 401(k). Also known as an individual 401(k), the solo 401(k) is a catchall term used to describe a variety of plans that let freelancers skirt some of the limits of a SEP. Instead of an either-or contribution limit on the dollar amount or the percentage of income, the solo 401(k) lets you contribute a set dollar amount, plus a percentage of profits on top of that amount. For example: This year, the solo 401(k) contribution limits top out at $16,500 ($22,000 if you're over 50). Above that level, you can contribute up to 20 percent of your income (or again, 25 percent if you're incorporated, as with a SEP). Any freelancer should take a look, but Tim Maurer, director of financial planning at Maryland-based Financial Consulate, says the solo 401(k) could work especially well for a two-income couple in which one spouse works for a company with a traditional 401(k) and pay that covers day-to-day expenses, while the freelancing member of the family is simply generating extra retirement income. If a couple is living on the income of one spouse and the freelancer is contributing $20,000 a year, the first $16,500 can go in the 401(k), plus an additional amount of 20 percent of his or her income up to that $49,000.