Retirement Options for Freelancers

Freelance writers enjoy a number of privileges in the work they do. You also find yourself in the same boat as every other self-employed person who doesn't have a clue how to handle retirement planning. Although the hope is to amass a fortune working for yourself or win the lottery, the vast majority of retirement accounts are not funded in this way. Just like working for someone else, your self-employed retirement is built through careful planning and consistent contributions. The main difference is that you have access to retirement plan options your traditionally employed friends do not.

Solo 401k Accounts

For 2009, you can contribute 100 percent of your earnings up to $16,500 and an additional 20 percent of your self-employment income. If you pay yourself a salary from a corporation you own, that increases to 25 percent. For this plan, you can only deduct the contributions made within the calendar year of your income taxes.

Unfortunately, the Solo 401k is not a plan you can run yourself, so seek the guidance of a brokerage firm. For moderate set-up and annual plan administration fees, the brokerage will handle everything, including the annual reporting to the IRS.

SEP Accounts

The Simplified Employee Pensions (SEP) account is an option available to all self-employed individuals. SEPs are similar to 401k accounts in that they allow you to contribute and deduct 20 percent of self-employed income, or 25 percent of salary paid from your corporation, with an annual limit of $49,000 in 2009. You also gain the freedom to contribute a percentage of income based on how well your business did. If income was slim, contribute less than you would when your business is flush with cash flow.

SEPs differ from 401k accounts with the simplicity offered. You don't have to send the government a report each year about the account and you can quickly set up your plan at almost any financial institution. This plan also helps self-employed individuals with last minute tax concerns. So long as you establish the plan and make your contribution before your tax filing deadline, your contribution is eligible for deduction on that year's taxes. For 2009 taxes, you have until April 15, 2010 to make your 2009 contribution, longer if you file an extension.

Keogh Plans

Keogh plans take on two distinct forms: profit sharing and defined benefit. If you think back to the pension plans formerly offered by the big companies for long-term employees, this is the same concept. Like 401k accounts, you must set up this account by year's end, but you can make contributions up to the tax filing deadline like a SEP. For the profit sharing option, the contribution percentages and limit is roughly the same as the SEP; however, you must send an annual report.

The defined benefit Keogh option is a very different animal. Rather than defining the annual contribution, you determine what annual income you'd like from the plan during retirement, up to a maximum of $195,000. Like an annuity or life insurance plan, an actuary takes into account how long you have until retirement, the total amount you want and your life expectancy. The actuary then provides an amount you must pay into the defined benefit plan each year to fund it. Unlike 401k accounts and SEPs, this is not a suggestion, but a requirement.

You may obtain a defined benefit plan outside of the Keogh, but rules are roughly the same. Due to the high reporting and set-up fees, this isn't a viable option for freelancers and business owners first starting out.

Reserve this option for later in your career when you have large amounts of cash to fund retirement and enjoy big tax deductions as a benefit.

Roth IRA

No matter what option you choose to fund your retirement, the Roth IRA remains on the table. Unlike your other retirement plan options, Roth IRAs do not offer a tax deduction in the year you contribute. Instead, your investment earnings grow tax-free and you pay no taxes at the time of withdrawal.

Contribution limits for 2009 for the individual are set at $5,000, but the amount begins to "phase out" when you reach an adjusted gross income (AGI) of $105,000. Because the Roth IRA is a different kind of individual retirement account, you and your spouse may both contribute $5,000, with the phase out level beginning at $166,000.

Before deciding on any plan, seek a free consultation with an investment consultant to learn more about your options. It's also a smart idea to check with your tax preparer to determine which option is most beneficial to your tax situation. Even if you determine starting a self-employed retirement plan is out of the question at this time, at least start funding a separate savings account or certificate of deposit for your future.