4 Ways to Start a Retirement Account as a Self-Employed Freelancer

Self-employed people have just as many ways to save for retirement as those working a 9-5 job. Laura covers the rules, pros, and cons of four easy retirement account options that any freelancer or entrepreneur can use to create a comfortable, happy lifestyle in retirement. 

Laura Adams, MBA
9-minute read
Episode #575

Some of the most common retirement account rules include having to pay a 10% penalty if you take withdrawals before reaching age 59½. And with all retirement accounts, you must own them solely in your name, even if you’re married.

But different types of retirement accounts come with different annual contribution limits or income limits. Depending on your work and financial situation, you may qualify to use several types of retirement accounts all at once. The more accounts you max out, the bigger your retirement nest egg will be.

Depending on your work and financial situation, you may qualify to use several types of retirement accounts all at once.

Here are four easy-to-use retirement accounts if you’re a freelancer or self-employed:

1. Traditional IRA

IRA is short for Individual Retirement Arrangement, which means that it’s a plan for individuals. Having an IRA means that you manage every aspect of it, such as opening the account, sending contributions, and deciding how to invest it.

With “traditional” retirement accounts, contributions are tax-deductible. For example, if you earn $60,000 and contribute $5,000 to a traditional IRA, you will be taxed on $55,000 of income only—not on $60,000.

Plus, when your investments in a traditional IRA make money, your gains aren’t taxed until you take withdrawals from the account. This is very different from earning money in a regular brokerage account, which is subject to tax every year.

Important rules: Anyone with earned income (including business income) under the age of 70½—including the self-employed, minors, and non-working spouses who file a joint tax return—can have a traditional IRA.

For 2019, you can contribute up to $6,000, or $7,000 if you’re age 50 or older, as long as you earn that much. You have until the tax filing deadline (including extensions) to make IRA contributions for the previous year.

Pros: You can have a traditional IRA no matter where you work. It allows you to save for retirement and defer tax on both your original contributions and earnings.  

Cons: If you or a spouse participate in a retirement plan at work, such as a 401(k) or 403(b), some or all of your contributions to a traditional IRA may not be tax deductible, depending on your income. Another IRA downside is having a low annual contribution limit compared to other retirement plans for the self-employed.

How to start: There are many places to open a traditional IRA, such as banks, investment firms, and insurance companies. Check out Betterment for simplified investing with low-cost exchange-traded funds.

Opening an account online is easy and you can transfer funds from your bank or rollover an old 401(k) or 403(b) balance with a previous employer. You claim traditional IRA deductions on Form 1040.

2. Roth IRA

Roth IRA is subject to most of the rules that apply to a traditional IRA—except when it comes to taxes and withdrawals. Contributions to a Roth IRA are not tax deductible, however, withdrawals of contributions and earnings during retirement are completely tax-free.

Unlike a traditional IRA, with a Roth IRA you don’t get an immediate tax break. But you can come out ahead if your tax rate is lower now than it will be in retirement. And depending on when you open your account, skipping tax on decades of growth could add up to massive savings.

Also, you don’t have to take any money out of a Roth IRA as long as you live. But with a traditional IRA, you must start drawing down the account after you reach age 70½.

You can withdraw your Roth IRA contributions without triggering tax or penalties before retirement. However, this doesn’t apply to earnings in the account, which would be subject to tax and the 10% early withdrawal penalty if you’re younger than age 59½.


About the Author

Laura Adams, MBA

Laura Adams received an MBA from the University of Florida. She's an award-winning personal finance author, speaker, and consumer advocate who is a frequent, trusted source for the national media. Money-Smart Solopreneur: A Personal Finance System for Freelancers, Entrepreneurs, and Side-Hustlers is her newest title. Laura's previous book, Debt-Free Blueprint: How to Get Out of Debt and Build a Financial Life You Love, was an Amazon #1 New Release. Do you have a money question? Call the Money Girl listener line at 302-364-0308. Your question could be featured on the show.