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#FreelanceFriday: IRAs and Your Retirement

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  • Tip Bones

It's always a good idea to plan for your future, especially financially. We're no exception as freelancers, but it can be hard to choose a retirement plan that works for you. With no traditional employer to make matching contributions to your account, one of the best ways to save for retirement is with an IRA, in one of its three forms: Traditional or Roth, SEP, and SIMPLE.

Firstly, it's important to understand your role in retirement accounts. You have to think of yourself as both employer AND employee, even if you don't have an LLC. Instead of those contributions a traditional employer might make, YOU are responsible for any and all employer contributions, as well as employee. So let's dive into the three types.

1. Traditional or Roth IRA

This is probably the easiest of the IRAs to open and maintain. They're quick and easy to open online, and they're considered individual accounts: no employer element necessary! That makes the paperwork easy to deal with. This plan is good if you're saving $6,000 or less per year, but that's a considerably low contribution limit. In a Traditional IRA, there's a tax deduction on contributions, but you'll have to pay tax on withdrawals. Roth IRAs are exactly the opposite: you won't get a deduction, but withdrawals in retirement are tax-free! It really comes down to when you want to receive a tax benefit, so if you're sure your income tax rate won't increase (many retirees find themselves in a lower tax bracket than when they were working), go for a Traditional IRA, but if you can do without an immediate deduction, open a Roth IRA, and have no worries about taxing within retirement.


A SEP IRA is only a little more complicated than a Traditional or Roth IRA. Withdrawals in retirement are taxed as income, but the plan does allow you to contribute a lot more to retirement. How much? In 2019, the limit is the lesser of $56,000 or 25% of net self employment earnings. You can calculate self employment earnings by finding your net profit, minus half of your paid self employment taxes and plan contributions. So basically:

Net profit - 0.5 × (self employment taxes paid + plan contributions)

But there's a catch: if you have other employees, you have to contribute the same percentage of their compensation as you do for yourself. So the more you contribute for your own plan, the more you have to put down for each employee, and that can get costly. I'd recommend this plan if you're starting to take in more income or have a few employees.


This one is a better choice if you run a small business, overseeing fewer than 100 employees. The employee accounts are owned by individuals, not you as an employer, so you're only required to make matching contributions up to a certain percentage of employee compensation (don't worry, this is usually only 3%), or a lower fixed contribution that requires no employee salary deferral. How much can you contribute for yourself? Only $13,000 per year, and that will be taxed as income in retirement. However, you can deduct your contributions, and write off contributions to employee plans as a business expense! Score! But be careful, because early withdrawals are subject to a penalty as well as tax: 10% penalty before age 59 1/2, and 25% if you withdraw within the first 2 years of opening the account.

Ultimately, it comes down to your savings goals and the type of business you run. A broker can help you find a great plan, even one like a single 401(k), no matter how you're working out your retirement.

Photo: Original. Melissa Selleys 2019.