After five years of freelancing I am happy to finally be in a position where I can contribute to my retirement again!
I initially set up a retirement account when I was 20. (Yes, I started early, but that was because I graduated college when I was 19!) The account was set up with my employer and I could only contribute while working there. After four years I had more saved for retirement than most people my age, but then I switched jobs upon my move to North Carolina. I decided to wait before transferring my account. Good thing, because I switched jobs shortly after my move. Good thing I waited again, because I decided to start my freelance writing business and needed to focus all my resources on that.
Seven years have passed since I last contributed to my retirement savings. Earlier this week I transferred my dusty employer-sponsored Individual Retirement Account (IRA) to my own Traditional IRA that I may now contribute to whenever I please!
As freelancers we do not have a pension plan waiting for us. Oh, yes we may! Check out the Simplified Employee Pension plan below. We create our business and we create our retirement. You may continue to write and freelance in your senior years, but how do you envision your retirement? Do you want to retire early? Are you going to be like Harper Lee who says she will never write again?
Freelancers have retirement options. I offer a handful of possibilities below with links to additional resources. All of the limits referenced are as of the 2014 tax year with respect to certain age brackets. Please verify all information independently:
Simplified Employee Pension IRA. SEP IRAs allow self-employed taxpayers to contribute up to $52,000 or 25% of their net income. If you have a fantastic year you can take advantage of it and put more toward your retirement. Upon satisfying age requirements, distributions will be taxed at the current tax rate at the time of distribution.
Traditional IRA. Contribute up to $5,500 annually and deduct 100% of your contributions on the respective tax year’s return. Upon satisfying age requirements, distributions will be taxed at the current tax rate at the time of distribution. Income limits apply. NOTE: The IRS states your total contributions to all of your traditional and Roth IRAs cannot exceed the contribution cap.
Roth IRA. Contribute up to $5,500 annually and deduct none of your contributions. Pay income tax on contributions in the year they are made. Upon satisfying age requirements, distributions will be tax-free upon withdrawal. Income limits apply. See note in last bullet.
Individual 401(k). You can contribute a specific dollar amount in addition to a percentage of profits. The solo 401(k) contribution limits are currently $17,500, plus up to 25% more of your income.
Freelancers Union 401(k). If you are not already a member of the Freelancers Union, join. It’s free. Not too clear on their retirement program rules, but according to their site as long as you receive 1099 income you qualify – and you may not contribute to a SEP plan in the same year you contribute to a FU401(k).
Resources to check out:
- Bankrate reviews Traditional IRA vs. Roth IRA
- Morgan Stanley outlines Setting up a SEP
- The IRS states the rules for Individual 401(k) plans
What do I plan to do? I’d love to retire early, but I am still not sure what that means to me. It may be nice to live as a non-writer for some time. In addition to my Traditional IRA, I will open a Roth IRA later this year, and my financial advisor recommends I open a SEP as well. Cliche investing choices in action: Diversify! Diversify! Diversify!
Even if you are not yet freelancing full-time you could open and contribute to the various accounts noted above. Might be something good to establish in advance so that you can start contributing right away when the time comes.
Remember, I am not a financial advisor and none of the information here is intended as financial or legal advice–check with a Certified Financial Planner or tax attorney to find what best suits your needs.