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Need to Know: Retirement Planning for Freelancers

Did you know that nearly 30% of Americans currently freelance? This percentage has doubled since 2014. With "The Great Resignation" in full swing, we can expect to see even more Americans opting for freelance life over a more traditional 9-5 office job.

Freelancers enjoy more flexibility, freedom, and financial versatility. However, freelancing also has significant implications for retirement planning. Here's what you need to know about the financial and retirement planning implications for freelancers:

Freelancing comes with extra costs + income inconsistency

While many freelancers enjoy having more control over their schedules, the tradeoff is income inconsistency and costs that many people may not take into consideration. Freelancers pay a 15.3% self-employment tax on earnings to cover Social Security and Medicare contributions, health insurance costs, and other benefits. There are also operating costs — ranging from marketing, technology, and office expenses.

When it comes to retirement, freelancers must be proactive

Employer-sponsored plans make it relatively seamless to begin saving for retirement. This will become even easier with the passage of SECURE 2.0. Without that easy access to built-in retirement plan savings,

“The single biggest obstacle to saving for retirement as a freelancer is the fact that you need to take the initiative,” Ben Henry-Moreland, founder of Freelance Financial Planning, told the New York Times. “You need to put aside some money, determine what type of retirement vehicles you want to use, then you have to find a provider or providers.”

Freelancers have four main options for retirement planning

  1. Simplified Employee Pension plan Individual Retirement Account (SEP-IRA), which are available to self-employed individuals with contribution limits that fluctuate from year to year.

  2. The Solo 401(k), which is for business owners with no employees (or anyone with an EIN and no employees). Because you can contribute as both an employee and an employer (of yourself), contribution limits are high and there are catch-up contribution options for people over 50.

  3. Health Savings Account (HSA), which allows freelancers with high-deductible health insurance to put aside pre-tax dollars. Although the money can be used for medical costs, the money can also remain in the account and can serve as an investment option.

  4. Roth IRA, which has an after-tax contribution limit of $6,000 per year and an additional $1,000 for those over 50. After age 59 1/2, those funds can be withdrawn tax-free, but the account has to have been open more than five year.

Are you pivoting to freelance work?

The Robin S. Weingast & Associates team can help you review your options and make sure your retirement planning doesn't get lost in the shuffle.

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