Benefits of a Solo 401k for Freelancers

Written by Nicola Brown on August 4, 2017

Though I’m still in the early stages of my freelance career, planning for retirement has always been top of mind for me. Like everyone else, I don’t want to end up working through my potential retirement just to pay the bills. While you may decide to continue working because you love what you do, it’s always great to have a choice.

That said, you should start spending some time looking into your options for your Solo 401k now, so you can maximize your benefits in the long run. It’s never too early in your freelance career to start setting yourself up properly for retirement.

Saving as a Freelancer

Because of the feast-or-famine nature of freelance work, it can prove challenging to maintain a steady savings commitment. Rather than setting a hard number to put aside for savings each month, build some flexibility into your commitment, so you can contribute less during slow months and make up for it during busy months. Just make sure you’re contributing the total amount you’ve committed to over the course of the year. A good rule of thumb? Aim to have 8–10 times your annual salary saved by the time you reach 65.

Do you dream of laying on the beach at your very own private island during retirement, or are you more comfortable with your lifestyle now? If you’re more visual than data-driven, look at it this way: What kind of lifestyle do you want when you retire? How does this compare to your current lifestyle and income level?

Work out how much you need to save for the income level you’d like to have in retirement, and don’t forget about increasing costs, like health care, as you age. Remember: Even though it may feel like you can work as a freelancer forever, that may not always be the case. Labor markets are constantly changing, so the availability of work, your desirability as a worker and the utility of your skill sets will fluctuate over time.

Saving and investing for retirement requires a more proactive approach when you freelance and don’t contribute to an employer-sponsored 401k retirement plan. If you’re used to contributing to a 401k through the company you worked for, registering for an Individual 401k will help you transition to the full-time freelance lifestyle without giving up the benefits of planning and saving effectively for retirement.

What Is a Solo 401k?

It’s a retirement savings plan available to business owners (and their spouses) who have no full-time employees. Like an employer-based 401k, it gives you the option to defer tax payments on a portion of your income until retirement age, when you’ll begin withdrawing money from the plan.

To qualify for a Solo 401k, you don’t need to freelance full time, but you do need to prove you have some form of self-employed income. You can’t employ any full-time hires (those over the age of 21 and working more than 1,000 hours per year for the same employer), but you can be registered as any of the following entities: sole proprietorship, partnership, limited partnership, limited liability company, C corporation or S corporation. You can still qualify for the plan even if you work full time and contribute to a regular 401k.

Brokerage Versus Self-Directed Plans

Deciding whether you want to go with a brokered or self-directed plan is a personal choice. If you don’t have the time, knowledge or confidence to take the reins, a brokered plan can be a good way to go. Self-directed plans typically allow you to access a greater range of investment options, including real estate, precious metals, private business, stocks and funds, private lending, tax deeds and liens. If you end up needing the money you’ve contributed before retirement, you can take out a loan from your account with both plans.

Why Freelancers Like Solo 401ks

Freelance work can often feel like riding a financial roller coaster, with boom and bust cycles from year to year. Because a Solo 401k allows flexible contributions, you can maximize those contributions (up to $106,000 for you and your spouse) in a good year and save your pennies in a not-so-good year. It’s also a good option for freelancers who’d otherwise fall into a high tax bracket, as taxes on contributions are only calculated when the money is taken out — which, at retirement age, often represents a lower tax bracket.

If you’re anything like me, part of the reason I chose to freelance full-time was to gain greater control over my work and lifestyle, which makes me a big fan of the flexibility in investment options and management control of the Individual 401k. Saving for retirement shouldn’t be an afterthought, especially if you work independently as a freelancer, contractor or consultant. Put good savings habits in place now, and they’ll pay off in the long run.

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