Unique Retirement Challenges for a Freelancer
When you’re self-employed, you may have to set aside money on your own and won’t have access to employee 401ks and matching programs, but you’ll still have many of the same options as those who are employed with a company. For instance, you still have access to both traditional and Roth IRA. In fact, there are IRAs that are specifically designed for those who are self-employed.
Freelancers often save for retirement using self-directed IRAs that allow the investor to choose when and what to buy and sell while also offering the same tax advantages as other retirement savings accounts.
We know that the unpredictable nature of a freelance career can make it difficult to set aside money on a strict schedule. However, it’s still important to set aside money when you’re doing well. In the next few sections, we’ll cover popular freelance saving strategies and the savings vehicles they use to plan for retirement.
Understanding your Freelance Income and Budgeting for Retirement
Freelancing turns people into planners, fast. You need to budget for everything from your day-to-day expenses to your quarterly taxes. Employers usually have an accounting team for that kind of thing but as a freelancer, it’s up to you.
Every industry has its fluctuations. Sometimes business is booming, sometimes it trickles. When it’s booming. If you’ve been self-employed for any amount of time, you know that it’s up to you to save enough to relax a little when the slow times roll by. That’s exactly what you’re doing when you’re saving for retirement, only on a larger scale. Here are a few ways you can prepare for the unpredictable nature of self-employment:
- Emergency funds: An important saving tool for anyone but especially useful for those with fluctuating income streams. Typically, people strive to keep three to six months of savings in an emergency fund, offering savers a safety net should work suddenly dry up. Your emergency fund is your first line of defense against falling into debt when times are slow. Many people will save their funds in a high-yield savings account. This keeps your money liquid and ensures your money can grow with inflation.
If all goes well, you will never have to use the funds in this account and the assets will be a welcome additional resource when it’s time to retire. If you do need the funds, you’ll be able to avoid early withdrawal penalties from retirement savings. Learn more about DCU’s business savings to help you meet your goals.
- Insurance: Savings accounts aren’t the only way to ensure you’re protected from life’s unpredictable nature. While out-of-pocket health and disability insurance may seem expensive, it’s important to stay covered should sickness or injury occur. Should you be unable to work, insurance can save you from falling into debt.
- Set Clear Retirement Goals: Visualize your retirement. Will you be traveling? Downsizing to a smaller home? Can you see yourself continuing to work part-time into your 70s? This will help you determine how much you'll need and offer you a sense of direction, giving you a savings goal to aim for.
Understanding the Types of Savings for Freelancers
There are many different types of freelancers. Some may have a predictable income that may allow for regular contributions, making it easy to grow standard IRAs. Here are a few details on the retirement savings options available to the self-employed.
- SEP IRAs: Standing for Simplified Employee Pension, a SEP IRA is a traditional IRA for small-business owners and the self-employed. The contributions are tax-deductible and can be combined with a traditional or Roth IRA.
- Solo 401(k)s: Designed to mimic an employer’s 401K plan, a Solo 401K is for those who are self-employed and do not have a full-time employee. You may choose a Traditional or Roth IRA under this account. While business owners with a Solo 401K aren’t supposed to have an employee, those who have a spouse who works for their business are allowed to cover their spouse under their plan.
- Get to know your retirement plan options better. Check out DCU’s selection of retirement accounts to see if there’s one that’s right for you.
Whether you’re self-employed or an employee of a large corporation, diversification of your income and retirement programs is imperative. A diverse retirement plan is more likely to withstand the unpredictable nature of our economy. For instance, while the low-interest bond may not seem appealing in times of inflation, it can support your savings should the stock market take a downward spin.
These days, many freelancers have learned to make multiple income streams from gigs. For instance, making tutorial videos for a skill that you know well may not make you instant money, but when you publish tutorials on the internet, you’re building yourself an asset that may pay you for decades to come. People also do this by taking client work and creating their own products or services in times when client work isn’t as available.
Seek Professional Financial Advice
Between saving for retirement, slow times and quarterly taxes, organizing the freelancing finance can be complicated. We recommend seeking counseling and banking at a supportive financial institution such as DCU.
DCU offers financial education, advice and financial tools to make planning easier. Need more help? Many freelancers turn to bookkeepers or fellow freelancing accountants to ensure their books are balanced, savings are funded and their taxes are paid. Contacting a financial advisor can ensure that you keep your peace of mind as you continue to grow your business.
Maximizing Your Retirement Deductions Safely
Are you interested in learning more about tax management as a freelancer? Check out our article on the basics of self-employment money management. There are many expenses that come with running your own business from the high-speed internet that keeps you in touch with your client to the van you may need to transport your product. This means you may also be able to deduct those from your taxes.
Consider using your tax refunds to make an annual splash in your retirement savings account. Remember important deductions such as health insurance as 100% of your premiums are deductible. Many retirement account contributions, up to a certain income percentage are also deductible.
Self-employment with DCU
When you’re a freelancer, you’re likely to need more financial guidance. After all, not everyone needs to pay quarterly taxes. If you’re looking for a more supportive financial environment, look into DCU membership to see if you’re eligible. We’re devoted to financial wellness. Whether you’re a member or not, feel free to explore the rest of our financial education articles.
Please note, membership is required to open a DCU savings account. Visit our membership eligibility page for more information.
This article is for informational purposes only. It is not intended to serve as legal, financial, investment or tax advice or indicate that a specific DCU product or service is right for you. For specific advice about your unique circumstances, you may wish to consult a financial professional.
*The national average annual percentage yield ("APY") for savings accounts is updated monthly, please refer to the Federal Deposit Insurance Corporation.
