How to save for retirement as a freelancer

Retirement savings for freelancers

As a freelancer, I’ll be honest about the perks: Yes, I can work most days in PJs and messy hair. Yes, I’m the “boss” and can give myself days off without consulting a corporate calendar. And yes, I can make my own hours. I’ve been a freelancer for almost my entire career, and as both a freelancer and a CERTIFIED FINANCIAL PLANNERtm professional, I’ve noticed how dramatically the gig economy has grown as company budgets have contracted, remote work opportunities have ballooned, and start-up tech companies specializing in connecting workers with jobs have made it easier for individuals to find steady income without just one employer. The gig economy is a trend that is expected to grow exponentially over the next few years and could strengthen to 42 million strong in the U.S. by 2020.

Of course, with all those perks come a few cons, including managing your entire paycheck, earmarking earnings for taxes, and budgeting for inconsistent income. There’s no benefits department to set you up with a company 401(k) plan, and it may be tough to figure out your retirement savings strategy, especially if your income fluctuates from month to month. The good news is you’ve got quite a few options to consider to help you get your retirement savings in full swing, even as a freelancer.

Account for past accounts

The most common question I get from new freelancers isn’t how to manage inconsistent income, it’s, “What should I do with my old 401(k)?” Many people have multiple 401(k) accounts from various past jobs that are left unattended for years. In fact, some don’t even remember if they had a 401(k) or not.

So, what do you do with those accounts once you enter the gig economy? You have a few options, and as with everything in personal finance, the choice is yours, and no answer is right or wrong for everyone.

Option 1: Leave your 401(k) alone

You might have the option to leave your 401(k) right where it is. Since you’re no longer working for the company, you can’t invest any additional funds into this account, but if the company allows you to keep the account open, it will continue to grow based on the investments you have chosen. If you decide to leave it as-is, make sure you know who the servicing company is. Keep tabs on your password and login information so you can do an annual check on performance.

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Option 2: Rollover your 401(k) to an IRA

If your former employer requires it, or if it is your choice to take possession of your 401(k), you can set in motion what’s called a direct rollover. This is important to note — you want to specify a direct rollover and not an indirect rollover. A direct rollover will move the assets in your 401(k) directly into a newly established IRA. That’s convenient since you never take possession of the funds. In an indirect rollover, you take possession of the funds and have 60 days to put them into a qualified retirement account. If you don’t, the funds are subject to taxes, and possibly penalties. If you chose a direct rollover, you can set up a new IRA with virtually any company – Betterment, Fidelity, Vanguard, to name a few popular options. Once you have a new IRA set up, you can continue to contribute up to annual limits.

Option 3: Withdraw your funds

When you’re jumping into the gig economy, it can be tempting to consider withdrawing some or all of the amount invested in a former 401(k) as a way to pad your bank account against lean months, or to use for start-up costs related to your solo business. But before you do so, think hard about the tax ramifications of such a move, even if the amount in the account is relatively minor. For one, you will owe a 10 percent penalty, and the funds will be taxed as earned income in the year you withdraw if you’re under 59½. In other words, in addition to income taxes, you will have to give up 10 percent of your money. This could cause a massive tax bill that you aren’t prepared for. Second, while your money is invested in your 401(k), it is growing tax-deferred until you retire, which is one of the benefits of a 401(k). If you move your money in a direct transfer to an IRA, you still reap all of those benefits and avoid any penalties.

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Other retirement savings strategies for freelancers

Roth IRA

Setting up a Roth IRA is a popular choice with freelancers because of its tax treatment of contributions and withdrawals when you retire. A Roth is a type of retirement account that packs a lot of perks. Here’s what you need to know:

  • Contribute up to $5,500 in 2018 ($6,500 if you are 50 or older). However, there are contribution limits for higher earners. The IRS has details on its website.
  • Withdrawals are tax-free in retirement
  • Contributions do not lower your taxable income now
  • You can’t roll your 401(k) into a Roth IRA because the tax treatment is different unless your 401(k) had a Roth component
  • Some freelancers like to use a Roth IRA as an emergency fund. The money you contribute to your Roth can be withdrawn at any point in time without tax or penalty. You can’t withdraw your investment gains before age 59½ for a non-qualified purpose without paying a penalty. The disadvantage of using your Roth IRA as an emergency fund is that withdrawing money lowers the growth potential of the account.

One concern many successful freelancers face is the contribution cap for a Roth IRA. If you’re earning a good income as a freelancer, contributing more to a retirement plan can help you further reduce your taxable income.


A SEP (Simplified Employee Pension) is a different type of IRA plan for anyone that has freelance income, is self-employed, or owns a business. You, as the employer, can contribute the lesser of 25% of your total compensation or $55,000 in 2018. There’s a special calculation for self-employed contribution limits, so be sure you talk to a tax pro or the IRS.

Solo 401(k)

A solo 401(k) (or it might be called an Individual 401(k)) works very much like a SEP IRA. You can contribute up to 25% of compensation up to $55,000 in 2018 (again, there is a special formula to calculate contribution limits for those that are self-employed), and employees may defer up to 100% of their compensation up to $18,500 for the 2018 tax year. As a business owner, you can contribute as an employer and an employee up to $55,000 total for the year.

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What happens if you return to the full-time workforce?

If you head back to work and have a new 401(k) that you can contribute to, take some time to chat with the plan provider to find out the rules and regulations.

  • Does the new 401(k) plan allow you to invest your old 401(k) plan assets (provided you haven’t done a direct IRA rollover)?
  • Does the new company offer a 401(k) match (important to know how much if the answer is yes)?

While you can contribute to both a 401(k) and an IRA, your tax deductibility could be limited depending on your income.

Retirement savings for the freelance life

I wouldn’t trade working as a freelancer for anything. I’m not a fan of cubicles, and fluorescent lights are just not my cup of tea. I’ve learned over the years how to navigate inconsistent income and all the tiresome parts of being a freelancer, like keeping track of receipts and managing separate bank and credit card accounts. Saving for retirement has been tricky, but I’ve found a good system that works, and so can you. Pick the retirement plan and options that work best for your lifestyle and income and commit to regular minimum contribution amounts each month. If you find yourself with more income at the end of the year, fantastic, contribute as much as you can up to the max in your plan. I’ve never met anyone who complained because they had too much money saved for retirement.

Shannah Compton Game is a CERTIFIED FINANCIAL PLANNERTM  professional with an MBA and is the host of the award-winning podcast, Millennial Money, where she shares totally relatable and easy to understand financial advice that will actually make you want to talk about money. Opinions expressed by the author are their own.

Haven Life doesn’t provide tax, legal or investment advice. This discussion is intended as general education only. We encourage you to work with your own personal tax or legal professionals and your financial advisor. Individuals involved in the estate planning process should work with an estate planning team, including their own personal legal or tax counsel.

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Haven Term is a Term Life Insurance Policy (DTC 042017 [OK1] and ICC17DTC in certain states, including NC) issued by Massachusetts Mutual Life Insurance Company (MassMutual), Springfield, MA 01111-0001 and offered exclusively through Haven Life Insurance Agency, LLC. Policy and rider form numbers and features may vary by state and may not be available in all states. In NY, Haven Term is DTC-NY 1017. In CA, Haven Term is DTC-CA 042017. Our Agency license number in California is OK71922 and in Arkansas, 100139527.

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