According to "Business News Daily," more than 40 percent of Americans will be freelancing in some capacity by 2020. If you currently are a freelance writer, you know that working for yourself has a lot to recommend it. You can set your own hours, choose your own clients as well as the much touted being able to work in your pajamas.
However, there's one area where freelancers are particularly vulnerable and that's in saving for retirement. Unlike their neighbors and friend who work for large corporations, freelancers bear the entire burden of retirement savings. For freelancers, there are no company pensions or matching 401k contributions. However, being a freelancer doesn't mean that you have to work until you're 90 years old. You just have to make retirement planning a priority.
Retirement plans for freelancers
If you're a freelance writer working at home, there are several retirement plans that will work for you. Some even offer tax benefits, a big help towards off-setting the self-employment tax.
1. Social Security.
Most self-employed individuals still qualify for Social Security benefits. That's part of what you're paying for with that self-employment tax. Like your friends who work for companies, your benefits will be based on how much money you earn in your 35 highest earning years. (If you work less than 35 years prior to retirement, the government uses zeroes for those absent years.) What differs for self-employed individuals is that this amount is your net income from your writing business. That's after your business expenses are deducted. You can claim Social Security benefits beginning at age 62, depending on what year you were born, but the monthly benefits are greater if you wait until you are age 70.
2. SEP IRA plan.
A Simplified Employee Pension (SEP) IRA plan is an easy way for freelance writers to save, no matter how much or how little income you make. This type of plan is available from most banks, credit unions and savings banks and has few, if any, fees associated with it. The government allows you to contribute up to 25 percent of your income (up to a cap of 52,000 in 2014) without having to pay income tax on the money. You are taxed when you withdraw the money from the account at retirement. "CNN Money" calls the SEP IRA the best best for those who work by themselves and plan to keep it that way.
3. Solo 401k.
A solo 401k is a good choice if you have other writers or employees working for you because you can make contributions both as a boss AND as an employee. Currently, you can contribute up to $5,500 as an employee ($6,500 if you are age 50 or older) and up to 25% of your income (subject to a cap of 52,000 in 2014) as a boss. Like the SEP IRA, your contributions are not subject to income tax until you retire and withdraw the money from the account.
4. SIMPLE IRA.
A Savings Incentive Match Plan for Employees (SIMPLE) IRA makes sense for a freelance writer who plans on hiring employees at some time in the future as it combines the best features of a traditional IRA and a 401k plan. With a SIMPLE IRA, you can continue to contribute to the same saving plan you started as an sole employee even after you grow your business and add employees. Each employee (including you) can contribute up to $12,000 each year. However, unlike the other plans, the company (that's you, again) is required to match 3% of each employee's contributions. As with the other plans, the funds are tax-deferred until the money is withdrawn at retirement.
So, don't think that saving for retirement is impossible if you make your living as a freelance writer. You simply have to take charge of your savings. You'll be rewarded not only with the security of knowing you have money set aside for your future, but with tax savings as well.
