Nov. 30, 2020 8 mins read

Key Considerations for Freelancers Before Opening a Retirement Account

Key Considerations for Freelancers Before Opening a Retirement Account

We’re in the midst of a significant economic shift. The gig economy is taking over the world, and the United States is leading the way.

Everyone’s financial situation is different, but without a regular paycheck and deductions built into your own payroll, retirement can be an afterthought.

According to the 2018 Betterment’s inaugural report “Gig Economy and the Future of Retirement,” gig economy workers are not preparing for their golden years early enough. Workplace savings for retirement is still the most popular way to save.

And it’s understandable. If you don’t know how much you’re going to earn, planning how much to save for the future in retirement can be tough.

You’re not alone, research has shown that:

Giggers are tech-savvy in finding work, but there’s a disconnect when it comes to freelancer tax filing and saving. Many freelancers sacrifice their income predictability and financial security when they’re getting started.

The financial services industry is riddled with pushy advisers, complicated finance products and confusing language. You need to understand your finances, tax obligations, and plans for your future.

“There are many other factors to consider when choosing a retirement plan that is right for you and for your business. A retirement plan has many benefits, including investing in the future now for financial security when you retire. As a bonus, you may qualify for significant tax advantages and other incentives.” Quote from Internal Revenue Service

By exploring retirement options from a young age, you can build pragmatic saving habits that will last a lifetime.

Know Your Retirement Needs (How Much Should You Save?)

Retirement planning begins with knowing how much you can afford to put away for retirement. First, picture yourself in retirement and envision the kind of retirement you want. Then make an estimation of the resources you will need to support your vision.

So how much should you save? As much as you reasonably can!

Many freelancers don’t have a clear idea of how much business and personal money they have. Scrutinize both your cash flow and expenses for the year to see how much you can save each month.

There’s an easy rule of thumb if you want to figure out how much money you should save for retirement. Just multiply your expected annual expenses by 25, also called the 4% withdrawal rule. Say you expect to spend $50,000 annually when you’re retired, you’ll want to have a $1.25 million portfolio saved up. If that number is unreachable, experts at Fidelity suggest 15% of your pre-tax income towards retirement every year.

Take note that this is only an indicative amount. This amount doesn’t take into account your current assets, liabilities and inflation rate. For a more accurate retirement plan, work with a financial advisor early.

Time is the most valuable asset you have when it comes to saving for retirement.

Decide the Best Retirement Account Type for You

After you have a sense of how much you can afford to save for retirement, now it’s time to find the best retirement account for your needs.

Without an employer-sponsored retirement account, the responsibility to save for retirement is 100% on you. There’s no employer matching contributions, payroll deduction or other provisions that automatically save for retirement.

The good news is that thanks to technology and judicious changes in tax policy (such as the SECURE Act passed in 2019), you can set up your own retirement funds to automatically save for retirement and receive tax incentives.

Every person has unique financial goals and risk tolerances. Using IRS tax-qualified plans like an Individual Retirement Account (IRA) or Individual 401(k) is a perfect way to start saving and investing for your retirement.

Here are the 4 most common plans for freelancers to help you choose the one most suitable for you. The contribution limits described are for those below 50 years old, after which the IRS allows for additional catch-up contributions.

1. Individual Retirement Account (IRA)

If you expect to earn more throughout your freelancing career, an IRA can offer you protection from taxes. There are 2 types of IRAs you can sign up for, and you can avoid taxes today (Traditional) or in retirement (Roth).

There’s even a known secret called back-door Roth that allows you to not pay taxes at all if the circumstances are right for you. If you’re not familiar with the two, we cover the differences between Traditional and Roth.

You may fund a Traditional or Roth IRA provided you have any type of earned income for the year. You may contribute up to $6,000 a year.

Almost every kind of bank, brokerage or other financial institution offers IRAs. An IRA lets you invest in stocks, mutual funds, bonds, and exchange-traded funds (ETFs).

You can get started with this guide.

2. Simplified Employee Pension IRA (SEP-IRA)

A Simplified Employee Pension (SEP) IRA allows you to make a bigger contribution than what’s permissible for a regular IRA.

Note that there are self-employed SEP IRA contribution limits. You can contribute the lesser of 25% of pay or $57,000 in 2020.

This makes it an ideal plan if your earnings are over $24,000, and you intend to save more than $6,000 for retirement.

Consider a SEP-IRA if you have 2 jobs, one as a freelancer and another as an employee. You can get started with this guide.

3. Individual 401(k) Profit-Sharing Plan

Solo 401(k) plan is very popular among full-time self-employed professionals.

If you’re in business yourself without employees other than your spouse, self-employed retirement saving plans will allow you to make contributions both as an employer and employee. One is a fixed-dollar amount, while the other is a percentage of net profit (hence the employer’s profit-sharing component).

The upfront tax break means your taxes are deferred till you begin withdrawing during retirement. What this means is more savings toward your retirement. As a freelancer, you can save up to $57,000 per year to maximize your benefits. With your spouse, this can be even as high as $114,000.

If you need a loan, you can get up to $50,000 (or half of the account value, whichever is lower) without tax or penalty.

You can make your own investment choices, and alternative investments (including real estate) are possible.

You can get started with this guide.

4. Defined Benefit or Pension Plan

If you have a consistent, high income and plan to save a lot of money for retirement continuously, you should consider a defined benefit plan.

This plan is a bit more complex to set up and requires a bit more planning, but your contributions can be far greater.

There are mandatory contributions every year. The contributions are calculated based on your age, benefit you’ll receive at retirement and expected investment returns. This also makes the cost of administration very high, and thus much more commonly found in the public sector like the government.

If you can commit to this plan for at least 3-5 years, and willing to pay $1,500+ per year, it can help you achieve your retirement goals sooner.

Fee Structures

Flat fee is better than percentage cost.

Like most things in life, saving for retirement is not free.

Since you’ll likely have less money to invest, every dollar should be working hard for you.

Investment fees can eat into the benefits of compound interesting in returns.

Some financial institutions will charge a flat fee, while others calculate fees based on your balance or your activity level.

Administration Features for Contributing to Your Retirement Savings Plan Automatically

Contribute and ensure you’re diversified and investing for growth.

Since you don’t have a constant income, planning to contribute the same amount each month can be difficult.

When you have to remind yourself and physically move the money yourself, it is tedious and stressful. Using new fintech features like automated saving tools or apps to save money will make the process easier.

You don’t have to be financially savvy to make smart investment decisions. The set it and forget approach of automated saving apps make saving for retirement a breeze.

Simply set up an automatic transfer of an amount you won’t miss, and set alerts should your income fluctuate.

With that out of the way, spare a few minutes every month to check in on your accounts. Reconsider and rebalance your investment when the need arises to adjust for your risk tolerance.

Doing this upfront can help you consistently save and get your hard-earned money to work for you and build financial security.

Payout Options

Many gig economy workers neglect the payout options when doing their retirement planning. Payouts can be before or after retirement, which gives you flexibility should the need arise.

Some 401(k) plans allow you to take a 401(k) loan or permanently withdraw money before the legal retirement age (hardships withdrawals). You can learn more about hardship distributions here.

With IRAs, you can start withdrawing after age 59.5. Before that age, you will pay taxes and penalties for early withdrawals, and you have to start withdrawing money from your account once you hit 70. With 401(k), you could start withdrawing money as early as 55 in specific situations.

On retiring, there are no restrictions. As you approach retirement, it’s a brilliant idea to consult a financial advisor to discuss how you’ll spend your money.


Today’s gig economy is creating both opportunities and problems for millennials.

As a gig economy worker, a freelancer retirement plan should be a self-driven pursuit. Getting ahead on your retirement goals can take some advance planning and creativity. At Gig Finance, we use different retirement strategies to build our own financial security. And we’re here to help.

Remember, time is on your side with compound interesting…

It’s never too early to start saving for your retirement. A little sacrifice now can have a significant impact on your future. With commitment and discipline, you can be on your way to a comfortable retirement.

It's not easy to get started as a freelancer, and our aim is to help all freelancers build a retirement plan. If you’re interested in reading more, please subscribe below to get new articles & actionable tips on how to stop overpaying taxes and start building financial security!