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No 401(k)? How to Save for Retirement When You Work For Yourself

Freelancing may not include tidy benefits like a 401(k), but there are plenty of options when it comes to retirement funds for self-employed people.

May 28, 2021

Working for yourself comes with some major perks. You decide how much you want to make, your hours, and where you work. Not being tied to one employer can feel very freeing, but you lose some of the benefits of being a salaried employee. One of those main benefits is enrolling in an employer-sponsored 401(k) plan and taking advantage of that sweet employer match. 

If figuring out how you’re going to save for retirement is holding you back from living out your self-employed dreams, we’re happy to report you have a lot more options for saving for retirement than you think. Let’s look at how to start a retirement fund for self-employed workers and the retirement fund options for the self-employed. 

Retirement Savings Account Types

While the 401(k) is a very popular retirement savings vehicle for those who work nine-to-five jobs, different types of retirement savings plans can provide similar benefits. Hopefully, one of these retirement fund options for self-employed workers stands out to you, and you can start saving.

SEP IRA

A SEP IRA could be an ideal option for anyone who is self-employed and has few or no employees. Only employers are allowed to contribute to a SEP IRA. So if you’re self-employed, you’re your own “employer.” Contributions to this retirement account are a business expense and considered a pre-tax deduction. If you’re a solopreneur, you can set up a SEP IRA for yourself, but if you have employees that work more than 1,000 hours each year and want to take advantage of a SEP IRA, you have to contribute to their SEP IRA accounts too.

This means if you contribute 20% of your own salary to your SEP IRA and have employees, you have to contribute the equivalent of 20% of their salary to their SEP IRAs. 

Speaking of contributions, as of 2021, you’re allowed to contribute up to 25% of your net earnings, up to $58,000, to a SEP IRA.  

Traditional or Roth IRA

Traditional IRAs and Roth IRAs are retirement savings options for entrepreneurs or freelancers who don’t have access to an employer-sponsored 401(k). If you participated in an employer-sponsored 401(k) at a previous job, you could choose to roll over those savings into an IRA. While IRAs have low annual contribution limits, they do come with some tax benefits. 

For 2021, the total contribution you can make to all IRA accounts (that means both Roth and traditional combined) can’t surpass more than $6,000 if you’re under the age of 50 and $7,000 if you’re age 50 or older.

Traditional IRA contributions can be tax-deductible, but limits apply if you or a spouse meet certain income thresholds or have access to a retirement plan at work. You contribute to your Roth IRA with money you’ve already paid taxes on. That means you can enjoy tax benefits down the road, as you won’t need to pay any taxes on the growth you’ve accumulated when you pull the money out at retirement. 

Solo 401(k)

Good news! You can contribute to a 401(k) even when you’re self-employed. A solo 401(k) is only available to business owners who don’t have employees. A unique benefit of a solo 401(k) is that you can contribute to the plan as both the employer and the employee. 

In 2021, self-employed individuals can make elective deferrals up to $19,500 or $26,000 if they are age 50 or older. They can contribute 25% of the “employee’s” compensation as defined by the plan on the employer side.

This means that you could put even more money into your retirement savings and snag an even bigger tax deduction than you would with a SEP IRA. 

How to Budget for Retirement Savings

Now that you know about retirement fund options for the self-employed let’s look at how you can make saving for retirement a reality. 

When you work for yourself, it’s easy for your income to fluctuate. The natural ebbs and flows of entrepreneurship can make saving for retirement a little tricky, especially if you’re on a tight budget. Here are a few tips and tricks for making saving for retirement more doable when you’re your own boss. 

Adding Retirement Savings Into Your Monthly Budget

Before you tackle how to start a retirement fund for the self-employed, you need to decide how much money you can contribute to your retirement savings each month. It can be hard to budget when you have an inconsistent income. 

If you really can’t estimate how much you’ll make each month, one way to make it easier is to refresh your budget every month based on how much you earned the month before. That way, you know exactly how much money you have to allot to your living expenses, retirement savings, and other financial goals like paying down debt

Accounting For Savings Limits

Another reason it can be helpful to reevaluate how much you need to save for retirement each month is that the different types of retirement savings accounts do have contribution limits that can be affected by your income. If you don’t know how much you’re making, it can be hard to nail this number down in advance. 

If changing your contribution amount monthly seems like too much work, you can also make contributions once a quarter after you’ve paid your taxes, as at that point, you might have a clear idea of your earnings for the past few months. 

Charging Accordingly

Employer-sponsored 401(k) matches are great. Who doesn’t like free money? But just because you’re missing out on that benefit doesn’t mean you can’t make up for it on your own. Your employer charges enough for their goods and services to hire employees and provide them with valuable benefits. As an entrepreneur or freelancer, you can do the same thing. 

When you’re pricing your services, consider how much salary you would like to make if you worked for someone else full-time. Also, decide how much you need to earn a wage you’re happy with while also paying for benefits like healthcare, time off, and retirement savings. 

Freelancing may not include tidy benefits like a 401(k), but there are plenty of options when it comes to retirement funds for self-employed people. With a clear idea of which retirement plan meets your needs, you can go back to enjoying the perks of self-employment.

Want to open up room in your budget to save more for retirement? Tally can help you pay down your credit card debt so you can use your savings to contribute towards a happy retirement!