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Building your freelancer retirement plan in the US

Arno Yeramyan
August 19, 2022

As freelancing and working as a solo professional became increasingly popular in the US over the last years, more people started to put in more time and effort to plan their personal retirement. Self-employment grants freelancers a lot of personal liberty, but with this level of personal freedom, freelancers also come across some challenges. One of the major challenges solo professionals come across is building a retirement plan.Unfortunately, many freelancers don’t pay enough attention to their retirement plan and end up with little savings for their retirement. But there is no need to be apprehensive about a self-managed retirement plan! Thanks to the current trends in the freelance market, there are multiple retirement plans for those who work for themselves.In freelancing, there are no pension contributions paid by the employer, no tax-deferred retirement plans, nor matching contributions mandated by the government and delivered by your employer. Instead, certain costs need to be covered by the solo professionals themselves.

Some technical details to consider

As the technical aspect of the issue goes, many small firms and those that run their operations through freelance gigs are either incorporated or LLC. This means that every registered company or enterprise is responsible for its 401k plan of retirement. The upside is that if your business is incorporated or LLC, you can make savings for an IRA (Individual Retirement Account) similar to ordinary employees working full-time jobs.

Choosing the right retirement plan

Our immediate advice is to carefully plan your retirement plan and start saving as early as possible. Although the late starters aren’t necessarily in a disadvantageous situation than those who start early, it is still a good idea. When it comes to personalized retirement options, the varieties are aplenty. Here are retirement plan options freelancers can use for savings:

  • Solo 401(k)s
  • Roth IRA
  • HSA (Health Savings Account)

SEP-IRA (Simplified Employee Pension)

SEP-IRA is ideal for freelancers and self-employed professionals who are paid once a month and face financial uncertainties. The plan is easy to start and manage. The good thing about SEP-IRA is that you can save for your future and get a tax break simultaneously. The sum of your contributions can change every year depending on your cash flow and financial situation.The contributions to SEP-IRA are made from the pre-tax income amount. This means the amount you deposit to SEP-IRA will not reduce the sum of your paycheck. You can quickly start a SEP-IRA at any moment and contribute up to a quarter of your annual net income. Likewise, you can contribute 20% of the current annual contribution ceiling or $55.000 every year. One other good thing about SEP-IRA is that the contributions are tax-exempt until distributions. This makes it an ideal plan to manage your financial operations in the future.


One other personal retirement plan is the SIMPLE IRA (Simplified Employee Pension Individual Retirement Agreement). Similar to SEP-IRA, the SIMPLE-IRA can be ideal for the owners of small firms and freelancers. The costs of SIMPLE-IRA aren’t too high, and the plan works functionally for those who wish to craft themselves a retirement plan. Compared to other retirement plans, SIMPLE IRA’s advantages are favorable tax treatment and more basic requirements regarding keeping records.The SIMPLE IRA facilitates tax-deferred retirement options for employees. For instance, in 2015 and 2016, up to 11,500 dollars could be contributed to the plan through salary deferrals, from an employee's paycheck, before deducting state and federal taxes from the salary. It must be kept in mind that the options of investment with this plan are limited to those allowed by the IRS.In smaller firms, the SIMPLE-IRA is sponsored by the employer, allowing savings to be tax-deductible. In addition to the possibility of contributing up to $12,500/year, your employer can contribute up to 3 percent of your earnings.One thing that differentiates this plan from the traditional 401k plan is the ‘elective deferral’ limit. For example, for SIMPLE IRA, the limit was fixed to $12.000 in 2017 and 2018.

Solo 401(k)s

As a qualified retirement plan for those who have a business and are self-employed, the 401k has a series of ideal options for investment savings. Likewise, it is ideal for those who run a small business with no fixed employees.The solo 401k plan enables you to postpone your taxes concerning your pre-tax contributions and financial enlargement. Having some features in common with a traditional 401k, the pre-tax contributions of a solo professional can be deduced from their earnings. Reducing the amount of taxable earnings is a significant benefit. For putting together a traditional 401k with complementary saving options for businesses, the Solo 401k is worth trying.

Roth IRA

In case the self-retirement options above do not meet your necessities, starting your own IRA may be a good idea. Roth IRA is especially easy for managing cumulative savings that were made under a previous plan, such as a 401k with a former employer. Roth IRA allows freelancers to contribute from their income after tax. In 2021 and 2022, the amount of annual contribution one can make most was $6000 to $7000.

HSA (Health Savings Account)

HSA is similar to a personal savings account, however,  it can be used for certain qualified healthcare expenses. To be fit for HSA, you need to be enrolled in a HDHP (highly-deductible health plan). HSAs come along with certain advantages as well as disadvantages.HSA contributions are made with pre-tax income. Meaning that, the HSA contributors don’t pay tax on the money that they put straight into their HSA account. While this can lower the annual tax bill of freelancers, the money in an HSA account can be costly to access if not used properly. HSA account holders owe income taxes in addition to a 20% penalty in case they withdraw cash from their account for non-qualified expenses before turning 65.

Saving for the future

Self-employed professionals usually have more expenses to consider, compared to full-time employees. These expenses can include self-employment tax, health insurance payments and other benefits they might need as a worker. Not to mention the marketing and distribution that comes with certain lines of work.Being a solo talent means you’ll need to take care of most of your employment related expenses, including your retirement plan, on your own. You can start with setting aside a month’s worth of business expenses to start your savings. Then, you can determine what percentage of monthly income you can set aside each month, and move on to a structured retirement plan to automate the process.Setting up a retirement plan might look daunting at first, but once you get the hang of it, you’ll be thankful you did it when you reach your retirement age! Don’t forget that your needs and responsibilities might differ greatly from other talents, so do a comprehensive research before deciding on the best plan for you.If you want to get more tips on how to manage your finances as a self-employed talent, register as a Ruuler and subscribe to our weekly newsletter!


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