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Retirement options for freelancers

April 19, 2022

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Freelancing has its perks – including freedom. One of the downsides is the missed opportunity to participate in a company retirement plan that matches your contributions. But if you’re fretting that you’ll be working until you’re 90, don’t worry. There are many vehicles that allow freelancers and other self-employed people to contribute to their accounts online. The best part is that these accounts are easy to open through many major brokerage firms and banks, and there are many investment funds you can choose to invest your contributions into. 

Here are some retirement options for freelancers:

Traditional or Roth Individual Retirement Arrangement (IRA) 

An IRA is typically the most flexible and easiest retirement account for freelancers and other self-employed individuals to set up.

The contribution limit is $6,000 for 2022 and $7,000 if you’re age 50 or older. With your contributions, you can allocate them among the different investment funds that your institution offers. 

One of the differences between a traditional and a Roth IRA is how they are taxed. With a traditional IRA, you can take a tax deduction on your contributions as an adjustment to income on your tax return, but they will be taxed when you withdraw the money. With a Roth, no tax deduction is allowed, but withdrawals are tax-free. Note that withdrawals before the age of 59 ½ might be subject to a 10% penalty.

One-Participant 401(k)

Also called a solo or individual 401(k) plan, this is like the standard 401(k) offered by companies to their employees, however, these are for self-employed individuals without employees. 

For 2022, you can contribute up to 100% of your earned income up to the total contribution limit of $61,000, with a catch-up contribution of $6,500 for those age 50 or over. 

A one-participant 401(k) is also a good option if you max out your contributions for an IRA, and you want to make even more contributions. 

Have an emergency expense and can’t find the funds? You’re able to take a loan from your 401(k) up to $50,000 or 50% of the total cash value. You’re unable to borrow from IRAs. 

Simplified Employee Pension (SEP) IRA

A SEP IRA has the same contribution limit as a one-participant 401(k). It allows a contribution of up to 25% of your income up to a total of $61,000 in 2022. However, unlike the IRA and 401(k) plans, catch-up contributions are not allowed. 

One thing to note is that early withdrawals from these accounts before the age of 59 ½ might be subject to a 10% early withdrawal penalty on top of any taxes for the distribution.

Choosing your investments

Now that your account is open, here’s the fun (or stressful) part. Choosing where to invest your money. Some accounts allow you to choose between stocks, ETFs, and mutual funds. It’s also important to consider asset allocation: what you should put in stocks versus bonds. What you invest in depends on your risk tolerance, goals, and years until retirement. Generally, the younger you are the riskier your investments can be because there’s enough time to ride out downturns in the market. The closer you are to retirement, the more conservative you should be to preserve what you have but still get interest and potential dividends. 

Still nervous and can’t choose? Thankfully, there are target-date funds based on which fund managers periodically adjust the underlying investments to get more conservative as the target date gets closer. So if you’re planning on retiring around 2055, choose a target fund around the year. 

Opening an account

Opening an IRA or one-participant 401(k) plan is an easy process that can be done online. You can open one through major and smaller financial institutions, and there are numerous online resources and articles that can help you compare institutions. 

The steps are simple. Once you’ve selected your institution, choose the type of account you’d like. Enter your personal information, select the type of investments you’d like, and set up your direct deposit information to start contributing.

Consult with a professional

As with anything tax-related, consult with a tax professional. You can also discuss with a financial advisor the type of account that would work best for you and your retirement goals. The best place to begin your search for a retirement plan, including updates to contributions limits, taxes, forms and other resources is at the Internal Revenue Service.


  • Tracy Abiaka

    A native of Phoenix, Tracy has a background in finance, mainly in investment services and taxation. She was also a Peace Corps volunteer in Rwanda. Tracy is currently a graduate student within the Walter Cronkite School of Journalism studying Journal...

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