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If you are not planning for retirement, what are you waiting for? Think you won’t live that long, or that retirement is so so so far off? Sure you have a lot of time, but that is what you need to properly plan: lots of time and a little money. Even if you have $300,000 upon retirement and receive payouts at 4% over 25 years, that is only $1,586.59 per month. That’s not much either, is it? That is why the earlier you start and the more time your money has to grow the better off you will be.

Options for Freelancers

There are quite a few retirement plan options for freelancers, some of which make even people with “real job” envious. If you have trouble choosing, keep in mind that you can open more than one type of account, which many freelancers do in order to take advantage of the different take breaks.

Another benefit of landing a part-time job with companies like UPS or Starbucks is their employer-matched 401(k) and stock option benefits. Since you are self-employed, as well as working part-time, you will not forfeit your right to open other self-employed retirement plans just because you have a 401(k). The IRS offers a free publication detailing 401(k) s for small businesses.

Simplified Employee Pension (SEP IRA)

With the SEP (also called a SEP IRA) you can contribute and deduct up to 20% of your income earned as a freelancer. If you incorporate and are your own employee this number jumps to 25%. You are not obligated to contribute the same amount or any money at all, from year-to-year. $41,000 is the maximum contribution you can make. If you are young and have the time, SEP is a good option.

Keogh Plan
This plan is for freelancers seeking a retirement plan similar to a 401(k). Contributions are based on a percentage of your income and like the SEP there is a maximum total contribution of $41,000.

Types of Keogh Plans:
1. Money purchase or profit sharing
You determine where money is invested. With the money purchase plan there is a set amount you must contribute each year, as opposed to the profit sharing plan that allows you to change the contribution from year to year.

2. Defined benefit
The amount you contribute depends on your income, your desired retirement benefit, and how many years until you retire.

Roth IRA
The maximum contribution per year is $3,000 if you make less than $95,000. If you are over 50 you can contribute an additional $500. The initial contribution can be taken out at any time. While SEP, 401(k), and Keogh plans allow you to write-off contributions in the year they were made, a Roth IRA forbids the deduction in exchange for a tax-free withdrawal in the future. In summary, with a 401(k), SEP and Keogh plans you’re allowed a deduction now, with a tax upon withdrawal, while a Roth IRA will not allow for a deduction now, and will not tax the money upon withdrawal. For this reason it is not a bad idea to open a combination of these plans for write-offs now and tax-free money later.  

The IRS offers a check-up online (Publication 405) that makes sure retirement plans for the self-employed are IRS compliant.