April 1, 2022
 min read

Self Employed Retirement Plans for Freelancers

Traditional retirement plans are made for traditional employees, not you. Level up with a SEP-IRA or Solo 401k that is designed specifically for the solo business owner.

The traditional IRA and Roth IRA are retirement plans you’re likely familiar with and probably already have - but why be basic when you are a freelancer and can do something extra? We are going to dive into what we consider to be two better plans - the SEP-IRA and the Solo 401k. These lesser known retirement plans are specifically designed for the independent consultant, contractor, and business of one. The best part - they let you save more for retirement, which in turn can reduce your tax liability.

We are going to touch on four different plans suited for the freelancer. If you have salaried W2 employees, just know that our recommendations are for people who are working solo and plan to stay that way. 

Our Top Choice: The SEP-IRA

For high-income freelancers looking to maximize tax savings without administrative tedium, we’ll hit you with the punch line - the SEP-IRA is your best bet.

The Upside: Why we love the SEP-IRA: For the high-earning independent business owner with no employees, the SEP-IRA gives you high tax savings done simply.  

The Details: Your maximum annual contribution is 20% of your net profit up to $58,000 in 2021 and $61,000 in 2022 for a sole proprietor or single-member LLC. This bumps up to 25% of your salary if you have an S Corp.  This is 3 times as much as you can set aside as a W2 employee - one of the biggest financial benefits of being self-employed.  Use Ruby Money's Retirement Calculator to figure out your max contribution for a SEP-IRA.  Contributions are all pre-tax, which means you can lower your tax burden by up to $20,000 annually.  Almost all brokerages offer SEP-IRAs you can set up online in minutes. It’s as simple as it gets.  You’re even qualified to open a SEP-IRA if you have another retirement plan from an employer such as a 401k.  Don’t worry if you’re late to the SEP-IRA game - you can open an account up to the due date of your business taxes, typically April 15 the following year.

The Downside: Our only note of caution on the SEP-IRA - it’s not the best option if you are bringing on employees into your business; you are required to contribute the same percentage to every employee as you contribute to yourself, which could cost you.

How to Set One Up: Most brokerages will offer SEP-IRAs with easy online setup - it'll take you five minutes. We love Guideline for their focus on small businesses and independent professionals.

Another Good Option: The Solo 401k

The Solo 401k is a good alternative if you are that unicorn that earns six figures, can put over 20% of your earnings towards retirement (you saver, you), has no employees, and likes paperwork.

The Upside: The best part is how much you can put away and reduce your tax liability. The max contribution is $58,000 and you can choose to save the money on taxes now, or save taxes during retirement through the Roth option - without the income limit.  Another perk - if your spouse works as an employee in your business, each of you can contribute up to $58,000.  That’s mega tax savings.

The Details: The maximum amount you can contribute to a Solo 401k each year is broken up into two parts:

1. You can contribute up to 100% of your compensation up to $19,500. That amount increases to $26,000 if you are over 50.

2. You can contribute an additional 20% of your net profit.

Your total sum contribution can be up to $58,000 ($64,500 if you are over 50).  You also have the choice to make contributions “traditional” - tax deductible now, or Roth - pay taxes on contributions now and have future distributions be tax free. 

The Downside: If you hate paperwork, this is not going to be fun to set up. There’s paperwork, and we mean paper. Although many brokerages offer Solo 401k’s, the experience is archaic, including mailing in paper forms and checks. The paperwork increases once you’ve saved over $250,000 - now the IRS wants an annual filing. You also cannot use the Solo 401k if you have any employees other than your spouse. Finally, you must have your Solo 401k contributions done by December 31 to receive tax savings that year.

The Other Options: The Traditional IRA and Roth IRA

Most business owners want to run things their way (otherwise known as the better way), but just so you have all the options, you can always go with the well-known IRA, traditional or Roth. These have been around for years, but they are typically not the best bet for a high-earning independent business owner given their lower contribution limits.

The traditional IRA: The traditional IRA is easy to set up online, but only has a maximum contribution of $6000 ($7000 if you are over 50).  The traditional IRA wasn’t made for the freelancer; it was made as a supplement to people with a typical 9-5, salaried job.  The SEP-IRA doesn’t have any minimum contribution requirements, so why not leave your options open for higher earnings, higher contributions, and higher savings?

The Roth IRA: The Roth IRA is an option if you are income qualified, can put in a maximum of $6000 annually ($7000 if you are over 50), and want to delay the satisfaction of tax savings until retirement.  The upside is that your money can grow over the years, tax free.   Roth IRAs are also easy to set up online.

There you have it!  You’re ready to open the best retirement plan made for you.  As always, you can consult your tax professional and financial advisor for that extra seal of approval.  

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