If you're a freelancer who's living paycheck to paycheck, you might want to take a hard look at your future finances. Consider a retirement plan to enact now. Here are several options suited to the freelance lifestyle.
Freelance writers and all self-employed people need to save for their retirement. When you are employed by a company, usually there is a retirement plan such as a 401(k). Freelance writers don’t have this option and need to start their own retirement plan to ensure they have something accumulated for their golden years. Here are some retirement plan options for freelance writers to consider.
Everyone can contribute $5,500 annually to an IRA, for those 50 or over at any point during this amount goes to $6,500. This is a great option if you are just starting your freelance writing business and don’t have a lot of excess cash to contribute. Beyond that, IRAs should be a consideration even as your business grows and you are able to contribute to other plans that allow for higher contribution limits.
In order to make a deductible contribution to a traditional IRA there is a phase out between adjusted gross income levels of $62,000 and $72,000 for single filers and $99,000 and $119,000 for those married filing jointly, if you are eligible for a retirement plan at work. Anyone can contribute to an IRA regardless of income, but the contributions may not be deductible. Regardless, contributions will grow tax-deferred until withdrawn. You must keep track of no-deductible contributions, as they will not be taxed upon withdrawal.
If you aren’t covered by a workplace retirement plan, there are no income limits restricting the amount that can be deducted. One related feature is the spousal IRA. This allows a spouse with little or no income to contribute to an IRA even if the other spouse is covered by a 401(k) or similar plan. Coverage by a workplace plan would also extend to a Solo 401(k), a SEP-IRA and others for the self-employed.
Roth IRAs also have income limits. For 2017, the phase-out for single filers ranges for am AGI of $118,000 to $133,000, for married filers it is $186,000 to $196,000. Above these limits you may not contribute to a Roth IRA.
A SEP-IRA is a type of IRA that works well for the self-employed. The contribution limits are higher. All contributions are considered to have been made by the business and not by the individual, as with a 401(K) or an IRA. In order to contribute to a SEP-IRA you must be a sole proprietor, a business owner, involved in a partnership or earn self-employment income by providing a service.
The advantage of a SEP-IRA is that contribution limits are much higher, ranging from nothing to 25% of your annual compensation. The maximum contribution for 2017 is $54,000. You can skip contributions for any year you wish.
Most major brokers and mutual fund companies offer SEP accounts, including Fidelity, Schwab, Vanguard and many others. You can invest the funds in your account in stocks, bonds, mutual funds, ETFs and a host of other investment vehicles.
A SEP-IRA account can be opened, and contributions can be made up for the prior year up to the date your tax return for that year is filed, including any extensions.
Understand that if your income is variable, then the amount that you are able to contribute some years might be less than you’d like, even if you could afford to contribute a higher amount.
Also, a SEP-IRA can become expensive if you have employees, as you will need to contribute the same percentage of salary for them as you do for yourself.
A solo or individual 401(k) works much like a 401(k) via an employer. There is an employee contribution of $18,000 annually ($24,000 if you are 50 or over at any time during the calendar year) and an employer profit-sharing contribution of up to 25% of compensation. The total dollar limits for both are $54,000 ($60,000 for those 50 or over) in 2017.
The employee contribution limit is the lesser of $18,000/$24,000 or 100% of your compensation, which means that as long as you have the cash to do so, your contribution will not be impacted by fluctuations in income as with a SEP-IRA.
Most major custodians like Fidelity, Schwab, Vanguard and many others offer these plans, but their rules may differ a bit. Some will offer a Roth 401(k) option, others may not. Aside from investments that may be prohibited by 401(k) rules or the plan offered by a particular custodian, you have a wide range of investment options to choose from.
A solo 401(k) is limited to individuals plus spouses or partners involved in the business. This is not the plan to choose if you have employees outside of those parameters.
A SIMPLE IRA is a good plan both for solo freelance writers and those of you with employees. You (or any employees) can contribute up to the lesser of 100% of your compensation or $12,500 ($15,500 if 50 or older) in 2017.
Employers must make a mandatory contribution to the participants of a 3% match or a non-elective 2% contribution (regardless of the amount any employee might contribute). As with the sole 401(k) or a SEP-IRA, you can open a SIMPLE IRA at most major custodians.
One thing to keep in mind with a SIMPLE, if you withdraw the funds in your account within the first two years of the plan’s inception, there is a steep 25% penalty if you are under age 59 ½.
Integrating with an employer retirement plan
If you work for an employer, and then do freelance writing on the side, you can still contribute to one of the self-employed retirement options listed above, but the overall limits on contributions (both via you as the employee and the employer) remain the same. There is no “double-dipping” here.
For example, if you are 40 years old and contribute $13,000 to your employer’s 401(k) plan the most that you could contribute to a solo 401(k) plan would be another $5,000 for the year.
This is not meant to be an exhaustive list of retirement plan options available to freelance writers. For example, if your earnings really blossom, you might consider a tradition pension plan. These tend to work better with higher levels of income and a predictable pattern of earnings and cash flow from the business.
Regardless of your situation, please make sure that you are saving for your retirement in some fashion. If you don’t, nobody else will do it for you. Freelance writing is a great way to make a living, but it is still an occupation.
Disclaimer: This article is meant as a guide for informational purposes only. It does not constitute a solicitation or provision of legal or financial advice, nor does it establish a client-attorney relationship. Please consult a professional in making any decisions for your business.