How to Save for Retirement When You’re Self-Employed

January 19, 2024

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Whether you call yourself self-employed, an independent contractor, or freelancer, you’ve probably got a good hustle going to keep your business moving.

But beyond plotting how to land your next client or expand your business, how far into the future do your plans take you?

Are you, by any chance, saving for retirement?

Whether you work for yourself or not, saving for retirement may feel challenging. But when you’re self-employed you may run into some other speedbumps like unpredictable income or uncertainty about which type of retirement account to pick.

So where do you start? Is there such a thing as an independent contractor retirement plan (or a way to create one?). The short answer is yes, and this guide could help you lay the groundwork for your self-employed retirement plan, highlighting saving options for freelancers to consider.

How much should freelancers be saving for retirement?

Before jumping into the different retirement accounts independent contractors may want to consider, let’s talk numbers.

To get started, we need to slightly modify a guideline about saving 10% to 15% of your income for retirement. For salaried employees (those who receive regular, predictable paychecks), the math could be pretty straightforward. They just need to look at a paycheck, pick a percentage between 10 and 15, and that’s it! They have a retirement savings target to meet every time money rolls in.

But when you’re self-employed, how much you earn and when you get paid can fluctuate. So, consider saving at least 10% to 15% of what you earn per year instead of per paycheck. With this simple tweak, the same retirement savings guideline that works for salaried employees could work for independent contractors.

This way you can figure out your annual retirement savings target and chip away at it. Since you’ll know what you’re aiming for, you could consider increasing your percentage when cash flow perks up. This could also help you compensate for leaner times and even get ahead just in case work tapers off.

If you need help figuring out an appropriate savings target for your retirement goals, you may want to consult with a financial advisor who could crunch the numbers for you.

Some ways you could figure out how much to save in retirement accounts every year

If you’re on track to make about the same amount as you did last year, pull out your tax return and check your adjusted gross income. This is how much you netted after deductions and other adjustments. It’s also the number you can use to calculate your 10% to 15% retirement savings target.

For example, if your adjusted gross income was $100,000, your target might be to save somewhere between $10,000 and $15,000 for the year. No matter how you decide to break that up – whether you put away a set amount once a month or just send funds bit by bit as you get paid – at least you’ll have a concrete number to aim for.

You could also pull up six months of pay stubs and estimate what you netted after sending in half the year’s estimated taxes. You can consider multiplying that number by 10% to 15% and making that your retirement savings target for the next six months.

Is this really what all freelancers should be saving for retirement?

The 10% to 15% guideline can be a good starting point and provide some structure. But how much you may need to save for retirement depends on a variety of things such as your age and your retirement goals. To help you consider how much you may want to save overall, plug in some numbers in our retirement calculator.

Good to know: If you don’t already have a budget in place, you could create one and see how saving for retirement fits in to it. New to budgeting? We’ve got you covered with some budgeting strategies to try.

A 401(k) for independent contractors

It would make sense if you thought only salaried employees could have 401(k)s, but freelancers can have them too. If you’re self-employed, you may be able to open a solo 401(k) (aka, one-participant 401(k) plan).

A solo 401(k) plan isn’t a new type of 401(k) plan. It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan. For more information on contribution rules and limits, see IRS’s One-Participant 401(k) Plans.

Don’t hesitate to reach out to a tax professional or financial advior if you have any questions about setting up an account.

Good to know: 401(k)s are typically subject to required minimum distribution ("RMD") rules. Visit the IRS website for details.

You can have an independent contractor 401(k) and a company 401(k)?

If you’ve got steady pay that includes a 401(k) benefit and you’re also freelancing, you could end up with both a 401(k) and a solo 401(k). If that’s you, keep an eye on how much you’re contributing as an employee because the annual contribution limit applies to all 401(k)s you may have.

Traditional IRA, Roth IRA and/or a SEP IRA for independent contractors

As a freelancer, you could also consider socking away funds in an IRA (Individual Retirement Account).

There’s more than one type of IRA, but they share some general features, such as annual contribution limits, when you can take money out without risking a penalty and if withdrawals are taxed.

A financial advisor may be able ot help you consider which retirement accounts you may want to choose. In the meantime, let’s go over three types of IRAs – Traditional, Roth and SEPs – that could help independent contractors to save for retirement.

Roth IRA

Traditional IRA

SEP IRA

	Roth IRA	Traditional IRA	SEP IRA
Highlights	Your contributions are made with after-tax dollars, but your withdrawals in retirement are tax-free as long as certain conditions are met.	Contributions are made with pre-tax dollars. You may be able to deduct your contributions from your taxable income, depending on your circumstances, and your money is tax-deferred until you withdraw it in retirement.	Your contributions may be tax-deductible, and your money is tax-deferred until you withdraw it in retirement. Generally, the maximum annual contribution limit for SEP IRAs is higher than Traditional and Roth IRAs. A SEP IRA follows the same investment, distribution, and rollover rules as Traditional IRAs.
Maximum annual contribution limits	Up to $6,500 for the 2023 tax year ($7,500 for those 50 and older). Up to $7,000 for the 2024 tax year ($8,000 for those 50 and older). See IRS’s IRA contribution limits for more information.	Up to $6,500 for the 2023 tax year ($7,500 for those 50 and older). Up to $7,000 for the 2024 tax year ($8,000 for those 50 and older). See IRS’s IRA contribution limits for more information.	A percentage of self-employment income up to a maximum contribution of $66,000 for 2023 and $69,000 for 2024. See IRS’s SEP FAQs for more information.
Withdrawals	Contributions can be withdrawn tax-free and penalty-free at any time. Withdrawals of earnings prior to age 59½ (or before the account is 5 years old) are generally subject to income tax unless it's a qualified distribution and to a 10% early withdrawal penalty unless you qualify for an exception.	Withdrawals prior to the age of 59 ½ are generally subject to income tax and a 10% early withdrawal penalty unless you qualify for an exception. After the age of 59 ½, withdrawals are subject to income tax, but there’s no early withdrawal penalty.	SEP IRAs follow the same rules as Traditional IRAs. Withdrawals prior to the age of 59 ½ are generally subject to income tax and a 10% early withdrawal penalty unless you qualify for an exception. After the age of 59 ½, withdrawals are subject to income tax, but there’s no early withdrawal penalty.
Required Minimum Distributions (RMDs)	No RMDs if you're the original owner of the account.	Required minimum distributions (RMDs) are withdrawals that you must make from Traditional IRAs starting at age 73 (or age 72 if you turned 72 on or before December 31, 2022). RMDs are required by the IRS, and failure to take RMDs may result in penalties. Visit the IRS for more information.	SEP IRAs follow the same rules as Traditional IRAs. RMDs are withdrawals that you must make from SEP IRAs starting at age 73 (or age 72 if you turned 72 on or before December 31, 2022). RMDs are required by the IRS, and failure to take RMDs may result in penalties. Visit the IRS for more information.
Who can contribute	You can contribute if you have taxable employment income and can meet certain criteria regarding your income and tax filing status.	You can contribute if you have taxable employment income.	You can contribute if you’re self-employed. Visit the IRS for more information on who can participate in a SEP IRA.
Tax deduction	Contributions are not tax-deductible.	Contributions may be tax-deductible if you meet certain eligibility rules. If you or your spouse is covered by a workplace retirement plan (e.g., 401(k)), you may not be able to deduct contributions made to this type of IRA.	Contributions may be tax-deductible. Visit the IRS FAQ page for more information.

Independent contractors can have more than one kind of retirement account

As you can see, there are a few places you can put your retirement funds when you’re self-employed. But you don’t have to pick just one: Freelancers may be able to mix and match retirement accounts (salaried employees may be able to do this too).

For example, you could have an IRA and a solo 401(k).

Or you could open a separate Roth or Traditional IRA and contribute your own money that way. Just keep in mind that whatever individual contributions you make cannot exceed the total annual contribution limit for IRAs.

Any additional retirement options for freelancers?

IRAs and a solo 401(k) are designed to help you save for retirement, but they aren’t the only options out there.

Your retirement playbook could also include certificates of deposit and high-yield savings accounts.

For added insights about saving for retirement, consider talking with your network of self-employed professionals as well as your salaried friends to see what they’re up to. Combined with information from your financial advisor, you can be on your way to creating a retirement plan that works for you now and that you can refine over time.

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