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Saving for Retirement as a Freelancer

How can freelancers save for retirement

Saving for retirement as a freelancer is easier than ever. As more individuals join the gig economy, they can choose retirement plans that are specifically designed for them.

Gig Economy Sees Participation from Older Demographics

Millennials are not the only demographic joining the gig/freelance economy. According to a study by the Freelancers Union and Upwork, more Baby Boomers and Gen Xers are entering the gig economy. The study revealed that 30% of Americans aged 55 and over had freelance jobs in 2018, such as freelance writing and Uber driving, as opposed to a regular 9-to-5.

Caitlin Pearce, the executive director of the Freelancers Union stated in an article that a lot of individuals 55 and over are beginning to explore freelancing either full or part-time, as it is a great way for them to “scale back” even if they don’t have enough saved to retire.

Baby Boomers and Gen Xers Join Gig Economy as Pensions Dwindle

Some Americans can no longer work a 9-to-5 job, but at the same time cannot give up working altogether. In the past, a “healthy” pension may have set them up for a comfortable retirement, but as employers switched from a defined pension plan to the 401(k), fewer individuals have the financial security that pension plans once offered.

Many Baby Boomers and Gen Xers do not voluntarily stop working. They may be forced out of a position and cannot find full-time employment due to their age. According to data collected by the Federal Reserve, 25% of retirees were forced out of their jobs due to a lack of employment opportunities. Yet Baby Boomers and Gen Xers still face everyday expenses, medical expenses, and some even have a mortgage.

As a result, this older demographic has turned to freelancing as a means of financial support when traditional employment is no longer an option.

Saving for Retirement as a Freelancer

Entering the gig economy can be an intimidating experience. You’re starting a new career and, ultimately, a new chapter in your life. Furthermore, by leaving a 9-to-5 job, you no longer have the option to participate in a work-sponsored 401(k) plan. However, saving for retirement as a freelancer is not impossible thanks to IRS approved retirement plans specifically designed for the self-employed and sole-proprietors, such as the Solo 401(k).

Self-employed individuals can also establish the SEP IRA, however it has fewer advantages than the Solo 401(k). For example, a SEP IRA only allows participants to contribute as an employer, whereas the Solo 401(k) allows contributions as both employer and employee. Additionally, there is no “catch-up” contribution when you reach age 50 with the SEP IRA. For 2019, if you are age 50 and over, you can contribute an additional $6,000 to your plan. That will make the maximum contribution $62,000 vs. $56,000 if you are over age 50.

The Solo 401(k)

The Solo 401(k) is a retirement plan designed for individuals who generate self-employment income. It can also be used if you are a small business owner with no full-time employees, excluding yourself, business partner(s) and spouse. It’s such an attractive plan because it has the components of a traditional 401(k), but without the costly administrative requirements.

Also called the one-participant plan, the Solo 401(k) has additional features you won’t find in a workplace 401(k). For example, you can borrow a $50,000 (or 50% of your account value) loan from the plan, which can be used for any purpose. The loan is tax and penalty-free and must be paid off at a five-year amortization schedule. Again, the plan offers high maximum contributions because you can contribute as both employer and employee.

No matter what your age, if you are self-employed or a small business owner with no full-time employees, you are eligible to establish the Solo 401(k). As the gig economy continues to grow, the Solo 401(k) is sure to be the retirement plan of choice.

To learn more about the plan, we encourage you to download our free Solo 401(k) info kit. This is the perfect place to learn about the plan’s features, IRS prohibited transactions and more.


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