Best Retirement Plans For Freelancers In 2024

More and more Americans are working as freelancers in the gig economy, posing huge challenges for their retirement savings goals.

For people relying entirely on freelance income, the lack of an employer-sponsored retirement plan becomes a “license for the neglect of saving for the future,” says Tim Maurer, a financial advisor at Buckingham Strategic Wealth.

Without the pressure of coworkers or HR departments, many side hustlers and freelancers may neglect to save for retirement. If you’re working as a contractor in the gig economy, here are your three best options to save for retirement.

1. SEP IRA

Self-employed individuals, small business owners with a few employees and side-hustlers who are already contributing to a 401(k) at work are all eligible to open and contribute to a SEP IRA. You must be 21 or older, have worked for the same employer in at least three of the last five years and have received at least $600 a year from the employer for each of those years.

This retirement plan is often referred to as a “profit sharing contribution,” says Roger Morrissette, Fidelity vice president of retirement and small business products. Employers are typically the sole contributors to a SEP IRA.

Contributions to an employee’s SEP IRA cannot exceed the lesser of either, usually, 25% of their compensation or $66,000 in 2023—although each employee must receive the same percentage. For 2024, the dollar cap part of that formula is $69,000.

With a SEP IRA, earnings grow tax deferred and contributions are tax-deductible.

Here’s how the percentage portion—the 25% or 20%—of the contribution formula is calculated. If you are self-employed by an S or C corporation, an incorporated partnership or a LLC and your business pays you, the business owner, a W-2 salary, as an employer your annual SEP IRA contribution is 25% of the owner’s W-2 salary (up to the SEP IRA contribution limit).

If, instead, your company is an unincorporated business such as a sole proprietorship, unincorporated partnership or a LLC that gets taxed as a sole proprietorship, you can contribute 20% of your net adjusted self employment income (or net adjusted business profits) to your SEP IRA.

A SEP IRA offers a lot of flexibility, as you can contribute different amounts every year, or nothing at all. It’s important to note that, like traditional IRAs and 401K(s), participants age 72 or over must take required minimum distributions (RMDs) from a SEP IRA. The trigger age for starting RMDs is 73 if you reach age 72 after December 31, 2022.

2. Solo 401(k)

Eligibility for a solo 401(k) plan is limited to self-employed individuals, or businesses run by a married couple with no other full-time employees. A solo 401(k) shares some similarities with a traditional 401(k), as it enables pre-tax contributions to be deducted from your income.

In a solo-401(k) plan, you wear two hats: One as employer and one as employee. Contributions are made under each of those hats, which lets you save significantly more money than with other plans for the self-employed, particularly at lower income levels.

As an employee, you can contribute up to $22,500 in 2023, or up to $30,000 if you’re 50 or older. (Those caps are $23,000 and $30,500 for 2024.) As an employer, you can only contribute up to 25% of your net adjusted self-employed income. (That ceiling becomes 20% if your company is an unincorporated business, as described in the SEP IRA section above.) This amount is your net earnings minus one-half of your self-employment tax and employee contributions you made for yourself. Total 2023 contributions cannot exceed $66,000 or $73,500 for those 50 or older. For 2024, those limits are $69,000 and $76,500 for people 50 or older.

The big benefit of the solo 401(k) over other plans for the self-employed is that you can make big pre-tax contributions at lower income levels because of the employee contribution, which can equal up to 100% of your earnings—meaning you’re not limited to the 25% of earnings of a SEP IRA.

Another advantage is that you can choose to make some of your employee contributions into a Roth account within the solo 401(k). You get no upfront deduction for money going into the Roth, but all growth and qualified withdrawals from the account in retirement are tax free and free from a 10% early withdrawal penalty.

“Qualified” means that you are at least 59 ½ year old and have contributed to the account for at least five years. That five-year rule is an extra requirement that does not apply to withdrawals from traditional 401(k) accounts. Still, with a Roth 401(k) you would be exempt from and age and five-year requirements if you become disabled or die. If you pass away, your beneficiaries receive the funds.

There is a big different between a Roth 401(k), solo or not, and a Roth IRA. You can withdraw your contributions at any time, any age, with penalty from a Roth IRA. But you can only take out contributions from a Roth 401(k) without penalty after you reach age 59 ½ or have died or been disabled for at least six months.

If you have a 401(k) at your main job, a Solo 401(k) probably isn’t the best choice for you. That’s because the contribution limits above apply cumulatively to all contributions to either plan.

3. SIMPLE IRA

SIMPLE IRAs are best for self-employed individuals or small business owners with 100 or fewer employees. To be eligible, employees must have earned at least $5,000 from the employer in any two preceding years and expect to receive at least $5,000 during the current year.

Both employees and employers can contribute to this plan. However, employers are required to contribute either a matching contribution of up to 3% of compensation (matching means the employee must contribute to get it) or 2% of all eligible employees’ compensation, regardless of whether they contribute.

Employees can contribute up to 100% of their compensation in 2023, to a maximum of $15,500 or $19,000 if they are 50 or older.

Like a SEP IRA, early withdrawals are subject to a 10% penalty if you are under the age of 59 ½. If you withdraw within the first two years of your plan participation, you’ll incur a 25% penalty instead. Your investments grow tax deferred until you make a withdrawal, and employer contributions are tax deductible as business expenses.

Don’t Forget an IRA

If you can afford it, consider contributing funds to an individual retirement account (IRA) in addition to one of the accounts above.

Contributions to Roth IRAs and traditional IRAs in 2023 are capped at $6,500 or $7,500 if you’re 50 or older. Those caps are $7,000 and $8,000 for 2024. Those caps are lower than the contribution caps for SEP IRAs and SIMPLE IRAs.