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Retirement Planning for Freelancers and Independent Contractors

Being your own boss makes a lot of things easier. Retirement planning isn’t necessarily one of them. Without access to employer-sponsored retirement saving accounts, freelancers and independent contractors need to be highly proactive about retirement planning. Access to retirement accounts isn’t a problem if you work for yourself; several kinds of accounts are tailored specifically for freelancers, independent contractors and small business owners. For many self-employed folks, the biggest barrier to retirement planning is figuring out how to get started.

Retirement Planning On Your Own

I advise freelancers, independent contractors and small business owners with few employees to take a structured approach to retirement planning. There’s a lot on your plate when you work for yourself. It’s too easy to push retirement planning down your to-do list, or neglect it altogether, because you’re so focused on growing your business. Employees who work for large businesses get annual reminders about employer-sponsored retirement accounts and the various savings vehicles available to them. Every time a traditional employee starts a new job at a large company, HR engages them in a discussion about retirement planning. When you don’t have that kind of oversight, I suggest you build in your own retirement planning checkpoints to make sure you don’t put it off.

Choose a date or week each year when you’ll review your plans, evaluate your progress and make any necessary changes. If new tax code has changed the way you can use your accounts, or if you’re not hitting your targets, you’ll be able to react quickly to maximize your savings. An annual review of your plans is also the perfect opportunity to consult with a retirement planning professional, ensuring that you’re not missing out on experienced guidance just because you don’t have an HR department.

Potential Retirement Planning Tools for Freelancers

I often suggest a mix of accounts and investment tools for my self-employed clients, as each one has unique needs. But three key account types are especially well-suited.

•    One-Participant 401(k): Often called a solo 401(k), this kind of plan is available to a business owner who has no employees or whose only employee is their spouse. Like with a traditional 401(k), both the employee and employer can contribute to a solo 401(k)—but in this case, as a self-employed individual, you fill both roles. Once you establish your solo 401(k), you may contribute up to $19,500 (in 2020 and 2021), or up to $26,000 (in 2020 and 2021) if you’re 50 or older. Your business may also make an annual contribution of up to 25 percent of your compensation. In total, during 2021 a plan participant may contribute up to $58,000 to their solo 401(k), or $64,500 if they’re 50 or older. Depending on the plan, it may be possible to make some contributions with post-tax dollars, allowing you to take some withdrawals tax-free in retirement.

•    SEP IRA: The SEP (Simplified Employee Pension) IRA is commonly used by self-employed individuals and small business owners with few employees. As the name suggests, SEP plans are pretty simple to establish and maintain. They’re available to businesses of any size, including one-person operations. SEP plans are funded by employer contributions only. As the employer, you may contribute up to 25 percent of your net earnings from self-employment to your SEP account, and/or any employees’ SEP accounts, in a given year. (For 2020, the maximum was $57,000; it rises to $58,000 for 2021 contributions.) As with a traditional IRA, SEP contributions are made with pre-tax dollars and withdrawals are taxed in retirement.

•    SIMPLE IRA: Like a SEP plan, a SIMPLE (Savings Incentive Match Plan for Employees) IRA is an employer-sponsored plan that’s relatively easy to set up. Available to businesses with fewer than 100 employees, including sole proprietorships, a SIMPLE IRA may be funded with both employee and employer contributions. For 2021, an employee may contribute up to $13,500 to their SIMPLE IRA, plus an additional $3,000 if they’re 50 or older. The employer has two contribution options. Either match up to 3 percent of each employee’s contribution, or make nonelective contributions of 2 percent of each employee’s salary, even if the employee doesn’t make their own contributions. A sole proprietor can make SIMPLE contributions wearing both employer and employee hats.

Are one or more of these accounts the right fit for your business? One challenge about retirement planning as a freelancer or independent contractor is that there’s no one-size-fits-all approach. Your business is unique and so are your needs.

If you’re self-employed, I urge you to consult with a financial planning professional to determine the strategy that makes the most sense for you. Along with the rest of the team at Sachetta Callahan, I’m here to help you make the decisions that best serve your life, your family and your goals. Contact me today.

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George Liakakis is a Certified Public Accountant and holds a Master’s Degree in Accounting from the University of Massachusetts Lowell. George has been working in public accounting for 7+ years with two different firms ranging in sizes from local to national. He joined our team in 2016 and focused on both business and individual taxation.