Are you a self-employed freelancer? Congratulations! You have the freedom to choose your own projects, set your own hours, and work from wherever you want. However, with this freedom comes the responsibility of managing your own finances, including planning for your retirement. As a self-employed freelancer, you don’t have the benefit of a company-sponsored retirement plan, but fear not, there are still several excellent retirement accounts tailored to your needs. In this article, we will explore the best retirement accounts for self-employed freelancers today.
SEP IRA
SEP (Simplified Employee Pension) IRA is a popular choice for self-employed individuals. It works like a traditional IRA, where you contribute pre-tax income, and your investments grow tax-free until you start making withdrawals at retirement age. As a self-employed freelancer, you can contribute up to 25% of your net earnings, up to a maximum of $57,000 for 2020. Contributions to SEP IRA are also tax-deductible, which can lower your tax bill while saving for your retirement.
Solo 401(k)
A Solo 401(k) is another excellent option for self-employed freelancers. It is similar to a traditional 401(k) plan that most companies offer to their employees, but in this case, you are both the employer and employee. As an employer, you can contribute up to 25% of your net earnings as a profit-sharing contribution, and as an employee, you can make contributions up to the annual limit of $19,500 for 2020. The best part about Solo 401(k) is that you can also make catch-up contributions if you are over the age of 50, up to an additional $6,500 in 2020.
Individual 401(k)
Individual 401(k) is another retirement account that is perfect for self-employed freelancers. It is similar to a Solo 401(k) but has some additional flexibility for those who have a spouse working in the business. This retirement account allows your spouse to participate and contribute to the plan as well, which can potentially double your retirement savings. You and your spouse can both make contributions of up to $19,500 each, plus the additional catch-up contributions if you are over 50, making it a powerful retirement account option for self-employed couples.
SIMPLE IRA
If you are a freelancer who works with a team of employees, then a SIMPLE (Savings Incentive Match Plan for Employees) IRA may be the best retirement account for you. This plan allows both you and your employees to make contributions, up to $13,500 for 2020, and you can also make additional contributions if you are over 50. As the employer, you must also match your employees’ contributions up to a certain percentage, making it a great option for those who want to offer retirement benefits to their team members.
Roth IRA
If you are a self-employed freelancer with a lower income, a Roth IRA may be the best retirement account for you. Unlike traditional IRAs where you contribute pre-tax income, Roth IRA contributions are made with after-tax income. While this means you don’t get an upfront tax deduction, the money grows tax-free, and you won’t pay any taxes when you withdraw it during retirement. Contributions to Roth IRA have income limits, so be sure to check if you are eligible to contribute before opening an account.
HSA
An HSA (Health Savings Account) may not be a retirement account, but it can be a valuable tool for self-employed freelancers planning for their retirement. HSAs are tax-advantaged accounts designed to help individuals cover medical expenses, but the money in the account can also be invested and grow tax-free. HSAs are available to individuals with high-deductible health insurance plans, and you can contribute up to $3,550 for individuals and $7,100 for families in 2020. The best part about HSAs is that the money does not need to be used for medical expenses, and it can be rolled over year after year, making it an excellent option for saving for future medical costs in retirement.
In conclusion, as a self-employed freelancer, you have several retirement account options to choose from, depending on your income, age, and business structure. It is important to assess your retirement goals and consult with a financial advisor to determine the best retirement account for your specific needs. Whichever retirement account you choose, the key is to start saving as early as possible, so you can enjoy a comfortable retirement when the time comes.