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Freelancers: How to Plan for Retirement

Updated on January 24, 2011

Freelancing is becoming the career path of choice for thousands who have lost their jobs in the new economy. The perks of freelancing are many, but a company sponsored retirement fund is not one of them. If you are wondering how to plan for retirement as a freelancer, you have a few options to choose from. Depending on how much you plan on earning, you could sock away up to $49,000 per year in one retirement savings plan.


The best retirement plan for freelancers, according to Money Magazine, is the Simplified Employee Pension Plan, or SEP-IRA. You can contribute 25 percent of your income per year, up to $49,000 for 2010 and 2011. Even if you don’t think you’ll make enough to max out your contribution, it is still a good deal. And if you max it out, you can open a traditional IRA and deposit another $5,000 into that, says Erika Safran, a New York City financial adviser.

When your freelance business takes off, you can hire your spouse as an assistant and include him in your SEP plan. You reduce your tax liability by paying wages and defer taxes on contributions to the pension funds.

The SEP-IRA provides you with tax-deferred growth of the contributions to your pension fund. The contributions are tax deductible. The contribution limits can vary between 0 and 25 percent each year, but each eligible employee must receive the same percentage. If you contribute 25 percent of your self-employed income, you must also contribute 25 percent of each of your employee’s income to the plan. Each employee must open an individual SEP-IRA account.

You can open an SEP-IRA at almost any bank. There are no IRS required plan-filings, but you must provide each employee with notification of contributions.

Solo 401k

The Solo 401k allows you to put away more than 20 percent of your income, but it comes with a little added hassle on the administrative end. With this retirement plan you can contribute $16,500 plus 20 percent of your income up to $49,000 per year, or $54,500 if you are older than 50. According to Beacon Capital Management Advisers, up to 50 percent of the assets in a Solo 401k can be borrowed tax and penalty free, making it an available source of funds for emergencies. It also allows catch-up contributions of an additional $5,500 per year for people over 50 years of age. Funds from an SEP-IRA can be rolled over into the plan, as can profit sharing, the Simple IRA, a rollover IRA and the traditional IRA, with some time restrictions.

Simple IRA

The Simple IRA may be the option if you will not make a significant amount of money freelancing. You can deposit 100 percent of your freelance income, up to $11,500 in 2011. Additional catch-up contributions are allowed for individuals over 50. Simple plans must be established by October 1 of the first tax year of the plan. The Simple IRA requires an employer match. The freelancer, as employee-owner, can contribute up to an additional 3 percent of the maximum allowed contribution.

The Simple IRA plan allows smaller businesses to set aside a larger percentage of income for retirement, and also allows employees to make contributions as well. Every participant is 100 percent vested when the contribution is made. No IRS plan-filings are required.


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      401k small business financing 6 years ago

      What about financing a startup with a 401k small business financing strategy?

    • profile image

      401k small business financing 6 years ago

      What about financing a startup with a 401k small business financing strategy?

    • profile image

      Jeff Boyle 6 years ago

      What about investing a solo 401k in investments such as real estate, notes, gold and private companies. Do you have any information on this?