Saving for retirement when you’re a freelancer

Lena Anthony had always been a loyal contributor to her employer-sponsored 401(k) savings plan, steadily increasing her paycheck contributions over a decade from four percent to 11 percent of her annual salary. "My parents drilled into me the importance of saving for retirement," says the married Nashville mom of two.

When she left her staff position to become a freelancer three years ago, Anthony had to find her own retirement plan. So she rolled over her retirement account to a Simplified Employee Pension Plan, known as a SEP IRA, that helps self-employed people and small-business owners get access to a tax-deferred benefit when saving for retirement.

"The biggest challenge is being disciplined and making sure I have that money at the end of the year," says Anthony, who says she contributes 25 percent of the profit from her freelance work each year. "Employers make it easy since the contribution just comes out of every paycheck." But freelancers have to make arrangements on their own.

Freelancers like Anthony are part of the transforming landscape of the American workforce. Today, one in three working Americans now performs some type of freelance work, ranging from moonlighting to living solely on independent contracts, according to a study commissioned by the Freelancers Union and Elance-oDesk, a firm that connects freelancers with clients.

A number of other studies show that not many American freelancers have sufficient retirement-savings plans in place.

Retirement Savings Options

For a better chance of retiring with peace of mind, freelancers can start by learning more about the ways they can save, including access to some kinds of accounts that are only available to the self-employed or small businesses. Here are some of the accounts Anthony had to choose from:

• Traditional and Roth IRA accounts: These are the same accounts available to many employed workers. Since the amount that can be contributed each year is relatively low, some freelancers look to other programs for additional savings, just as those with full-time employment might have an IRA plus an employer-sponsored plan.
• The SEP IRA often has higher contribution limits, allowing freelancers to save a portion of each year's total earnings.
• An Individual 401(k) plan, also known as a Solo 401(k), has two components: The freelancer can make one contribution as an employee and another as the employer; in some cases, that allows a larger total retirement contribution for the year.