Are You a Gig Worker or Freelancer? Here’s How to Prepare for Retirement

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Gig workers have some unique retirement accounts available to them. Which is best for you? Keep reading to find out. 

If you’re a gig worker, your financial situation can be a little more complicated, and not necessarily in a good way. For example, you might have to pay self-employment tax, which can increase your effective tax rate by as much as 15.3%. You’ll also be responsible for providing your own health insurance, and you don’t get many other benefits commonly available to employees.

You’ll also need to plan for your own retirement savings, as self-employed people don’t have an employer’s plan like a 401(k) or 403(b) to use. However, this can be one of the biggest financial perks of being self-employed. Here are three accounts you have access to as a freelancer or gig worker.

SIMPLE IRA

The first of two special types of individual retirement accounts, or IRAs, available to self-employed individuals is the SIMPLE IRA. “SIMPLE” stands for “Savings Incentive Match Plan for Employees,” and for 2023, the SIMPLE IRA contribution limit is $15,500 from employees, with an additional $3,500 catch-up contribution allowed from those age 50 or older.

Self-employed people are the employer as well as the employee, so they can make employer matching contributions in addition to these limits. Employers are allowed to match employee contributions dollar for dollar to a maximum of 3% of their compensation. So, to make a long story shorter, this means that self-employed people can contribute as much as $31,000 to a SIMPLE IRA, or $38,000 if they’re 50 or older, if their income allows it.

SEP-IRA

SEP-IRA accounts (“SEP” stands for “Simplified Employee Pension”) have higher overall contribution limits than SIMPLE IRAs do, but a rather complex contribution cap. Specifically, all contributions to a SEP-IRA are considered to be employer contributions and can be as much as 25% of total compensation. With self-employed individuals, there’s an exclusion that essentially limits contributions to 20% of net self-employment income.

Overall, the maximum contribution limit to a SEP-IRA in 2023 is $66,000; however, a self-employed individual would need net income of $330,000 or more to be able to put that much into their account. To figure out how much you could put into a SEP-IRA, multiply your Schedule C net income by 20% (0.2).

Solo 401(k)

A solo 401(k) — also known as a one-participant 401(k) or individual 401(k) — is specifically designed for self-employed workers. The downside is that compared to the other two account types, solo 401(k)s have more paperwork requirements (especially as the account starts getting larger), but they also typically have the highest contribution limits.

Solo 401(k) owners can make contributions as both the employee and employer. As the employee, the maximum contribution for 2023 is $22,500, with an additional $7,500 allowed for those 50 and older. But on the employer side, you can contribute up to 25% of your net self-employment income. The maximum overall contribution limit in 2023 is $66,000, or $73,500 for those 50 or older.

Traditional and Roth IRAs

While they don’t have the highest contribution limits, it’s worth mentioning that traditional and Roth IRAs are still available for self-employed individuals. In 2023, eligible individuals can contribute as much as $6,500, with a $1,000 catch-up contribution allowed for account owners aged 50 and older.

In some cases, one of these can be used in combination with one of the special retirement accounts discussed earlier. For example, since a SEP-IRA only allows for employer contributions, you may be able to make traditional IRA contributions to the account as well.

Which is best for you?

Like most financial strategies, there’s no perfect option for everyone. It depends on your income level, your retirement savings goals, and several other factors. The best bet is to weigh the pros and cons of each one to decide which is best for you.

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