Freelancing doesn’t come with all the benefits that employees get. Many freelancers see things like retirement savings as a bit of a pipe dream because they can’t see where or how they can put away extra money.
Far too often, freelancers use most or all of their income to ramp up more business and keep the cycle going. This behavior can become a pattern, and before soon, they’re retiring without a penny to their name.
The pressure to find consistent work as a freelancer can be high, but the need for a reliable savings account is higher. If you’ve still got some catching up you do, have no fear. We’ll walk you through the steps to start saving now.
How Important Is Saving?
Saving is critical for surviving many of life’s uncertainties, whether it be for retirement, personal emergencies, or a plunge in the market.
The way freelancing works, it can trap the mind into thinking only of the now since work can be so short-term. This mindset means things like long-term savings and retirement goals go out the window for the sake of next month’s rent or generating new income.
If you don’t want to be working in your 70s, start saving now. It’s also a good idea for more immediate needs, like income tax and an emergency fund.
As a 1099 contractor, you don’t have to pay taxes on the money you earn before you receive it, so you’re responsible for saving a portion for annual taxes.
While your path to retirement as a freelancer might look different than an employee with a W-2 and 401k, it doesn’t mean it’s less critical.
How to Save for Retirement as a Freelancer
As a self-employed freelancer, you have a few options available for retirement savings accounts:
Open an IRA
An Individual Retirement Account (IRA) is an easy way to start saving for retirement. Even without any employees, you can open one of these accounts.
IRAs come in two forms: traditional IRAs and Roth IRAs.
With a traditional IRA, you can deduct any money saved from your annual taxes. Once it comes time to take out your money for retirement, you’ll have to pay taxes on it as it counts as a form of income.
With a Roth IRA, any contributions you make are not tax-deductible. If you need to withdraw money from the account, there’s no tax penalty.
To decide between the two, figure out what would help you more from the perspective of taxes. A Roth IRA is smart for those with low freelance income expected to grow over time, while a traditional IRA is better for those with high income right now.
Are you looking for a retirement option that’s a bit more advanced? Get to know the Simplified Employee Pension (SEP) account. Small businesses commonly use these accounts, but individuals also can use them to save for retirement.
A SEP works for a freelancer when the employer (you) adds money each year to an IRA created for employees (that’s also you). You can make these contributions on behalf of your business and yourself.
If you run into any challenges as you start to grow your nest egg, don’t lose hope. Getting adjusted to a lifestyle of regular savings and planning for the future can be hard for freelancers at first, but you’ll be better off for it. Start by opening one of the savings account options mentioned above and slowly but surely build up your money saved.