The Freelancer's Guide to Retirement Savings (SEP IRA, Solo 401k, and More)
As a freelancer, you have no pension, no 401k match, no retirement plan waiting for you. You're responsible for building your own.
This is actually an advantage. You have flexibility and tax advantages that employees don't.
But you have to actually do it. Most freelancers don't, then panic at 60 when they realize they have no savings.
Let's fix that.
The Retirement Savings Problem
Employees get 401k matches. The company contributes money to their retirement. Freelancers don't get this.
You need to save 15-25% of your income for retirement to have a comfortable retirement. That's $150-250 per month on a $100k income.
Without structure, most freelancers save nothing.
Tax-Advantaged Options
The IRS gives self-employed people several retirement savings options with tax advantages.
SEP IRA (Simplified Employee Pension)
The SEP IRA is the simplest option for solo freelancers.
How it works: You contribute up to 25% of net self-employment income, max $69,000/year (2024 limit).
Example: You earn $100,000. You can contribute $25,000 to a SEP IRA. That reduces your taxable income to $75,000.
Tax benefit: If you're in the 25% tax bracket, that $25,000 contribution saves you $6,250 in taxes.
Setup: Takes 15 minutes online. Many brokers offer SEP IRAs.
Ongoing: Minimal paperwork. You just contribute and file a simple form.
Vesting: It's your money. You can take it out anytime (with tax penalty if before 59.5).
Loan: You cannot borrow from a SEP IRA.
For most solo freelancers, SEP IRA is the right choice.
Solo 401k (Also Called Self-Employed 401k)
The Solo 401k is more complex but allows higher contributions.
How it works: You contribute as both employee and employer. Employee contribution max is $23,000/year. Employer contribution max is 25% of income. Total max $69,000/year (same as SEP IRA).
Difference from SEP IRA: More flexibility, but also more paperwork.
Loan option: You can borrow up to $50,000 from your Solo 401k. SEP IRA doesn't allow this.
Setup: Takes 1-2 hours to set up. Need to file Form 5500-N (simple version) annually.
Ongoing: More paperwork than SEP IRA.
When to choose: If you want the ability to borrow from your retirement, or if you have employees (more than just yourself), Solo 401k is better.
For solo freelancers, Solo 401k offers no advantage over SEP IRA for most people.
Roth IRA
The Roth IRA is different. You contribute after-tax money (not tax-deductible), but the growth is tax-free.
Contribution limit: $7,000/year (2024). Same as employees.
Tax advantage: Growth is tax-free. At retirement, you take out money with zero taxes on growth.
Income limit: You can't contribute if income is over roughly $161,000 (2024, single).
Early access: You can withdraw contributions (not growth) anytime without penalty.
Strategy: Roth IRA is great as a secondary savings vehicle after you max out SEP IRA or Solo 401k.
Backdoor Roth
If your income is too high for Roth IRA, use Backdoor Roth.
Contribute to Traditional IRA, then immediately convert to Roth IRA. Taxes owed on the conversion, but then it grows tax-free.
This is advanced. Talk to an accountant.
Which Should You Choose?
Solo freelancer, modest income ($50k-$150k): SEP IRA. Simple, effective, minimal paperwork.
High income ($150k+): SEP IRA or Solo 401k (similar contribution limits at high income, Solo 401k gives loan option).
Want flexibility for loans: Solo 401k.
Will have employees: Solo 401k is better set up for this.
Already maxing out SEP/Solo 401k: Roth IRA for additional tax-free growth.
Setting Up Your Retirement Plan
Step 1: Choose your plan (SEP IRA most common for solos).
Step 2: Open an account. Go to Vanguard, Fidelity, Schwab, or similar. Takes 15 minutes online.
Step 3: Fund it. Calculate how much to contribute based on your income.
Step 4: Invest it. Most people use low-cost index funds. Set and forget.
Step 5: Every year, set aside money for contributions and contribute before tax deadline (April 15 + extension).
Contribution Strategy
Don't wait until year-end to contribute. Calculate quarterly estimates and set aside money consistently.
If you need $25,000/year, set aside $6,250/quarter. This prevents scrambling at year-end.
Automated contributions work great. Set up automatic transfers to your retirement account.
Investment Strategy
Most freelancers should invest in low-cost index funds.
Vanguard Total Market Index: Simple one-fund solution. Own entire US stock market.
Vanguard Total World Index: US + international for diversification.
Target-date fund: Automatically adjusts to more conservative as you age.
Don't overthink this. Index funds are boring and work. Boring is good for retirement.
Catch-Up Contributions
At age 50+, you can contribute extra ($7,500 extra to IRA, $7,500 extra to 401k). Take advantage of this if you're behind.
Employer vs Self-Employment Tax
Contributions to SEP IRA or Solo 401k reduce your self-employment tax (15.3%).
A $25,000 contribution saves you roughly $3,600 in self-employment tax, on top of income tax savings.
This is powerful tax advantage that employees don't get.
Tax Deduction
Contributing to SEP IRA or Solo 401k is directly deductible from your taxes. This is not a credit. It reduces your income.
If you earn $100k and contribute $25k, your taxable income is $75k.
Vesting and Withdrawal
Contributions are yours. You can withdraw them anytime, but before 59.5 you pay:
- 10% penalty
- Taxes on earnings (not contributions in Roth)
This lock-in is intentional. It's to prevent raiding your retirement.
Hardship withdrawals exist but are rare and have strict rules.
Hiring an Accountant
If your retirement planning is getting complex, hire an accountant. They'll make sure you're improving tax-wise and following rules.
Cost: $300-500/year. Worth it for correct strategy.
FAQ
Should I contribute if I'm just starting and income is low?
Start small. Even $100/month adds up. At 8% growth, $100/month for 30 years becomes $100k.
Can I contribute if I have no income?
No. You can only contribute up to the amount you earned that year.
Can I have both SEP IRA and Roth IRA?
Yes. Max out SEP IRA first, then contribute to Roth IRA.
What if my income fluctuates?
Adjust contributions based on actual income that year. You don't have to contribute the same amount every year.
Can I withdraw for a down payment on a house?
Not from SEP IRA without penalty. Roth IRA contributions only (not growth).
Should I be aggressive or conservative with investments?
Young person (30s/40s)? Aggressive (100% stocks).
Closer to retirement (55+)? More conservative (60/40 stocks/bonds).
Is retirement planning worth it if I don't have much saved yet?
Absolutely. Starting at 35 instead of 25 costs you $200k+ in compound growth over 30 years.
Should I prioritize retirement saving or paying down debt?
High interest debt first (credit cards). Once that's gone, retirement savings.