Best Retirement Plans For Freelancers In 2024

Muhammad Ahmad

Best Retirement Plans For Freelancers In 2024

Best Retirement Plans For Freelancers In 2024

The gig economy is seeing an increase in the number of Americans working as freelancers, which presents significant obstacles to their retirement savings plans.

According to financial advisor Tim Maurer of Buckingham Strategic Wealth, for those who depend solely on freelance income, not having an employer-sponsored retirement plan is a "license for the neglect of saving for the future."

Many freelancers and side giggers need to remember to save for retirement if they are not under the same pressure from HR departments or coworkers. These are your top three retirement savings options if you're a contractor in the gig economy.

1. Individual Savings Plan

To open and contribute to a SEP IRA, one must be self-employed, a small business owner with a few employees, or a side hustler who already contributes to a 401(k) at work. To qualify, you must be at least 21 years old, have worked for the same company for at least three of the previous five years, and have earned at least $600 annually from them.

According to Maura Cassiday, vice president of retirement and small business products at Fidelity, this retirement plan is frequently called a "profit-sharing contribution." Usually, employers are the only ones contributing to a SEP IRA.

A worker's SEP IRA contributions are limited to the lesser of $66,000 in 2023 or, typically, 25% of their salary; each worker must receive the same portion of the funds. The dollar cap component of that formula is $69,000 for 2024.

Contributions to a SEP IRA are tax deductible, and earnings grow tax deferred.

This is the formula used to calculate the percentage portion of the contribution, which is either 25% or 20%. Your yearly SEP IRA contribution is equal to 25% of the owner's W-2 salary if you work for yourself as an employee of a S or C corporation, an incorporated partnership, or an LLC and your company pays you a W-2 salary (up to the SEP IRA contribution limit).

You may contribute 20% of your net adjusted self-employment income (or net adjusted business profits) to your SEP IRA if your company is an unincorporated business taxed as a sole proprietorship, such as a sole proprietorship, unincorporated partnership, or LLC.

You can contribute any amount to a SEP IRA or a different amount each year, giving you great flexibility. It's crucial to remember that, just like with traditional IRAs and 401K(s), SEP IRA participants who are 72 years of age or older must take required minimum distributions or RMDs. After December 31, 2022, if you reach age 72, the trigger age for beginning RMDs is 73.

2. Individual 401(k)

Only self-employed people or companies owned by a married couple with no other full-time employees are eligible for a solo 401(k) plan. A solo 401(k) is similar to a traditional 401(k) in that it allows you to deduct pre-tax contributions from your income.

You have two hats to wear in a solo-401(k) plan: employee and employer. Because contributions are made under each of those hats, you can save a lot more money than you could with other self-employed plans, especially when your income is lower.

Employee contributions are limited to $22,500 in 2023 (or $30,000 if you are 50 or older). (For 2024, those ceilings are $23,000 and $30,500.) You are limited to contributing 25% of your net adjusted self-employed income as the employer. (As explained in the SEP IRA section above, that ceiling increases to 20% if your company is an unincorporated business.) This sum represents your net income less the employee contributions you made for yourself and the first half of your self-employment tax. The contribution cap 2023 is $66,000, or $73,500 for people 50 and above. These caps are $69,000 for 2024 and $76,500 for individuals 50 years of age or above.

The main advantage of the solo 401(k) over other self-employed plans is that you can contribute a significant amount of pre-tax money at lower income levels because of the employee contribution, which can reach 100% of your earnings. This means you are not restricted to the 25% of earnings allowed in a SEP IRA.

An additional benefit is allocating a portion of employee contributions to a Roth account inside the solo 401(k). Money deposited into a Roth account does not result in an upfront deduction; however, all account growth and eligible withdrawals made during retirement are tax-free and do not incur a 10% early withdrawal penalty.

To be considered "qualified," you must be at least 59 ½ years old and have made at least five contributions to the account. Withdrawals from conventional 401(k) accounts are exempt from the additional five-year rule. Nevertheless, if you had a Roth 401(k), you would not be subject to the age or five-year requirements in the event of your death or disability. The money goes to your beneficiaries in the event of your death.

A Roth 401(k), solo or not, and a Roth IRA are very different. With a Roth IRA, you can withdraw your contributions at any age and without incurring penalties. However, you can only withdraw money penalty-free from a Roth 401(k) once you turn 59 and a half, pass away, or become disabled for at least six months.

You should avoid a Solo 401(k) if you have a 401(k) at your primary employment. This is so because all contributions to either plan are subject to the above cumulative contribution limits.


SIMPLE IRAs are ideal for independent contractors or small business owners with 100 or fewer employees. Employees must anticipate receiving at least $5,000 from the employer this year and at least $5,000 from the company in any of the two years before being eligible.

Employers and employees may both make contributions to this plan. Employers must, however, contribute 2% of all eligible employees' compensation, regardless of whether they match or a matching contribution of up to 3% (matching requires the employee to contribute to receive it).

In 2023, employees can contribute 100% of their compensation up to a maximum of $15,500 or $19,000 if they are fifty or older.

If you are under 59 ½, early withdrawals are subject to a 10% penalty, just like in a SEP IRA. Instead, a 25% penalty will be if you leave the plan during the first two years of enrollment. Employer contributions are tax-deductible as business expenses, and your investments grow tax-deferred until you withdraw them.

Remember to Maintain an IRA

In addition to one of the accounts above, consider funding an individual retirement account (IRA).

The 2023 contribution cap for traditional and Roth IRAs is $6,500, or $7,500 if you're 50 or older. The 2024 caps are $7,000 and $8,000, respectively. The contribution caps for SIMPLE and SEP IRAs are higher than those caps.

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