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A freelancing career offers many advantages, but with that comes a new set of responsibilities. As a freelancer, it's up to you to be proactive about things like paying quarterly self-employment taxes and managing retirement savings.

Where traditional employees typically rely on their employers to set up retirement plans, freelancers must formulate their own savings strategies to build a sufficient nest egg for their golden years. Fortunately, there are several different approaches you can take to ensure that your retirement needs are met.

Beyond the Savings Account

An emergency savings fund is a must-have for freelancers. Having six months' worth of expenses saved at all times provides an important buffer for the times when you lose clients or you're hit with unexpected financial demands. But while creating an emergency savings account is a good start, it shouldn't be where you stop saving.

You may also choose to have a savings account for long-term priorities such as your retirement, funding your children's education, travel, medical expenses, or other priorities. Such accounts should be distinct from your emergency savings. When a client contract ends out of the blue, you don't want to dip into your other funds to cover groceries.

Freelancers should look at options that offer long-term tax benefits, as well as investment opportunities to grow your wealth well into your retirement years. Again, because you're your own boss, you need to create savings and investments structures for yourself because when you're a freelancer, no one else is going to do it for you.

Retirement Savings Options

Your retirement savings should be even more comprehensive. Once you've established a foundation for emergency and long-term savings, you can begin considering the following accounts that enable freelancers to begin building savings for retirement:

  • SEP IRA: The Simplified Employee Pension (SEP) plan is a type of individual retirement account (IRA) that enables you to set aside a portion of your income for retirement savings on an annual basis. It is similar to a traditional IRA but it's specifically designed for freelancers and owners of businesses with only one or two employees. Importantly, its annual contribution limits are significantly higher than those associated with traditional or Roth IRAs. You can contribute up to 25 percent of your annual income or $7,000 in 2020, whichever amount is lower. SEP contributions are tax-deductible; however you should note that if you deduct funds before you're 59½ years old, you may have to be subject to an additional 10% tax. You'll also need to pay taxes when you begin withdrawing distributions, even if you don't take them early. In general, SEP IRA account holders must begin distributions at the age of 70½. However, with changes put place by the 2019 SECURE Act, account holders who reach or reached the age of 70 on July 1, 2019, or later do not have to begin taking distributions until age 72.
  • Roth IRAs: Roth IRAs differ from SEP plans in that they are not tax-deductible. They also have lower contribution limits; $6,000 annually for account holders under age 50, and $7,000 for those age 50 and up. However, you can draw on the funds tax-free when you need them later in life. You can also continue contributing during retirement and you’re not legally obligated to withdraw these funds. Some people may opt to use the account as a means of accruing wealth for their families after they pass away.
  • Solo 401(k): Just because you’re a freelancer doesn’t mean you have to miss out on the benefits of a 401(k). A solo 401(k), sometimes referred to as a One-Participant 401(k) plan, is designed for self-employed business owners who are their companies’ only employees. Because you are the employer and the employee, you can contribute under both roles. Currently, freelancers under the age of 50 can contribute up to $19,500 per year as employees, and those age 50 and over can contribute up to $26,000. Then you can also make an employer contribution of up to 25% of your compensation.
  • Taxable Brokerage Account: After you’ve built six months of emergency savings and established traditional retirement accounts, you might consider investing in the stock market. A taxable brokerage account enables you to do so by paying a broker to make investments on a variety of stock options. Unlike the above options, you can invest as much money as you choose into a taxable brokerage account, and there are no limits to how much money you can withdraw and when.

Plan for Your Future

While a freelance career is rewarding, it can also be volatile without the proper financial planning. By taking control of your retirement savings strategy now, you can enjoy a dynamic, engaging professional life without worrying about being able to survive retirement down the road. Just make sure to stay up-to-date on the progress you’re making to reach your financial goals while saving for retirement as a freelancer.

This material is presented for informational purposes only and should not be construed as individual tax or financial advice. KeyBank does not provide legal advice.

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