When I finally decided to quit employment and become a full-time freelancer, a lot was going on in my mind. I knew the moment for my freedom, flexibility, and the ability to control every single cent of my income had finally come. However, I became aware that being self-employed, I would miss out on several employee benefits.
One of the benefits was the inability to invest in the 401(k). I had to look for an alternative plan to save for my future and retirement, and it was not easy. There are several reasons I was not able to start saving for my retirement right away. I also understand that a lot of fellow freelancers also go through the same challenges that I went through which include:
- Unsteady income
- Being in debt
- Education expenses
- Healthcare expenses
- The cost of running the freelancing business
Besides these, I learned that I needed to be financially disciplined as a freelancer to achieve my goals of saving for retirement. I researched and realized that I could consider retirement savings to be one of my business expenses. This way, I would ensure that I contribute the pre-tax dollars, which lowered my taxable income.
Over the years, I have realized that I get to contribute more as a business owner and a freelancer every year. This is more contribution than I would have contributed to an individual IRA. The following are a few retirement savings plans that any freelancer interested should use to prepare for their future and retirement. If you’re looking for other ways to finance your retirement as a freelancer, research as many other possible ways on how to save money for your retirement before it’s too late!
One Participant 401(K)
The one-participant plan is reserved for sole proprietors who don’t have even a single employee apart from a spouse working with them. This plan allows one to contribute as an employee and as an employer. This means the limit is much higher than the rest of tax-advantaged plans. In this plan, the standard corporate allows us to invest a pre-tax payroll deduction from our pay checks. The employer is given the option to match the contributions up to a certain amount. The contributor and the employer are both allowed some tax breaks for both of their contributions.
It is also known as a simplified employee pension. It’s one of the most straightforward plans to establish and operate that I usually recommend for sole proprietors. The program is very flexible as it allows one or two employees. In this plan, only the employer makes contributions. So, as a freelancer, I’m able to contribute 25% of my net earnings.
This plan allows for flexible contributions to make a lump sum payment at the end of the year, and one can even skip the contribution. They also don’t have a funding requirement. The plan’s simplicity and flexibility make it more suitable for a freelancer working alone to undertake. But there is a different rule if one has people working for them. One doesn’t need to contribute to the plan every year, but they will have to contribute for all the employees when they decide to do contributions.
This plan is a very elaborate one that is meant for self-employed people and freelancers. However, the program is the most potential retirement savings plan among other planning options. The plan is suitable for businesses with a high earning freelancer/business owner and a few other lower-earning employees. An example is a medical and legal practitioner. The Keogh plan takes a defined contribution plan whereby a fixed sum or a percentage of it is contributed over a stipulated pay period. However, the freelancer’s business must be unincorporated and set up as a sole proprietorship, partnership, or a limited liability company.