In the ever-evolving landscape of the current labor market, solopreneurs, freelancers, and independent contractors are carving out their paths to success. 

You enjoy certain freedoms that traditional employees do not. You can be your own boss, set your hours, choose your projects, and take time off whenever possible. 

However, life in the gig economy can sometimes come with a hefty price tag. You likely don’t have an employer matching your 401k contributions or providing a pension. That makes it critical that you take matters into your own hands and proactively save for retirement. 

Much like seasoned explorers mapping out uncharted territory, independent workers have to navigate the challenges of financial stability, risk management, and long-term planning — but partnering with an experienced guide can make a difference in your journey and help you reach your goals easier.

Being a free agent also means you’re responsible for your entire contribution to Social Security and Medicare (employers typically pay half) via self-employment (SE) tax, paid quarterly to the IRS. Savvy retirement investing can deliver some significant tax advantages to help you come out ahead. 

Let’s delve into the most innovative investment tools for those on an independent path and how to craft an individualized retirement plan that best suits your needs. 

Embrace the Power of Consistency

The sooner you start socking away money for retirement, the more time it has to grow. Thanks to the power of compound interest, starting in your 20s and 30s can make an enormous difference compared to waiting until your 40s or 50s.

As a freelancer, your income might fluctuate more than a roller coaster, and that’s perfectly normal. However, consistent contributions to a retirement fund can help smooth out those ups and downs. Establish a healthy habit of setting aside a percentage of your earnings every month. Even a small amount can grow into a substantial nest egg over time.

Some years you may be able to save more, and other years less. But automate it as much as possible so the money comes out before you’re tempted to spend it. Online banks and financial apps make it easy to set up automatic transfers into different savings and investment accounts.

Going Solo

Once you get into building your nest egg mindset, one of the most powerful tools at your disposal is a solo 401(k), also known as a one-participant 401(k). These are designed for business owners with no employees and mimic many features of an employer-sponsored plan. You can also bring your spouse on board. 

As long as you have an employer identification number, you can open one of these accounts. The annual contribution limit is $66,000, with an additional $7,500 for those 50 or older. A 401k gives you a golden opportunity to bridge the gap between your savings and your retirement aspirations.

You can pick your tax advantage. With a traditional 401(k), your contributions reduce that year’s income, which lowers your tax burden. Distributions made in retirement are taxed as ordinary income.

While a Roth solo 401(k) offers no initial tax break, you’ll enjoy tax-free growth and qualified withdrawals in retirement. This is a better option if you expect a higher tax bracket in the future. A Roth solo 401(k) offers higher contribution limits than a Roth IRA without  income limitations

Reliable Allies

An individual retirement account (IRA) can provide freelancers, independent contractors, and sole proprietors with flexibility and certain tax advantages. Contributions to a traditional IRA are generally tax-deductible, while Roth IRAs allow you to make after-tax contributions and you won’t have to pay on the money you withdraw.

You may also want to consider a SEP (Simplified Employee Pension) plan or SEP-IRA. The IRS has a model SEP plan document, Form 5305-SEP, Simplified Employee Pension, as does the US Department of Labor. These guides can help you better understand your options and determine which is right for you.

Depending on your financial situation, you can choose the one that aligns best with your long-term goals. IRAs’ customization and control are a perfect fit for the freelance lifestyle..

Health and Wealth

Diversification isn’t just a buzzword; it’s a guiding principle for all prudent investors, including freelancers. Spread your investments across various asset classes like stocks, bonds, and real estate. Diversification minimizes risks and maximizes potential gains.

Aim for a well-balanced portfolio based on your risk tolerance and time horizon. Target date funds offer an easy preset allocation that automatically adjusts over time. 

The self-employed can open health savings accounts (HSAs) to save for medical expenses pre-tax when paired with a high-deductible health plan. In 2023, you can contribute up to $3,850 for individual coverage or $7,750 for family, plus an extra $1,000 if you’re 55+.

HSAs provide triple tax benefits. Contributions are pre-tax, growth is tax-free, and withdrawals for medical costs are tax-free. The funds roll over year to year if you don’t spend them. After age 65, you can take non-medical withdrawals without penalty.

When you’re flying solo, the responsibility for retirement planning rests with you, but enlisting the expertise of an experienced advisor can be a game-changer. I’ll review your financial outlook and make tailored recommendations to help you set goals, choose suitable investments, and develop an income strategy for your later years. There’s no time like the present — reach out today!