For contract workers, saving for retirement can be daunting. Here’s how to get started.
Contract workers often struggle to save for retirement.
And there are droves of them — now making up more than 1 in 10 US workers, according to research from MIT Sloan professor Paul Osterman.
The number of independent or gig workers has nearly doubled since 2020, according to data from MBO Partners, a platform for contract workers. These include both temporary workers as well as workers on longer-term projects through staffing firms.
There are, however, several relatively painless saving options to help workers get traction on their own. If you have earned income, you can save for retirement in a tax-advantaged saving option, like an Individual Retirement Account (IRA), even if you’re starting with a small amount.
“Self-employment brings freedom and flexibility, but it also requires a do-it-yourself approach when it comes to saving and investing for retirement,” Catherine Collinson, CEO and president of Transamerica Institute, told Yahoo Finance. “Without an employer and employer-sponsored retirement benefits, it’s easy to procrastinate,” she said, “especially if you feel like you can’t afford to save. A pressing question is: Can you afford to not save?”
Last year, Gen Xers accounted for 3 in 10 independent workers, millennials made up 33%, and Gen Zers were 19%. In addition, about a quarter of women workers are not offered any retirement benefits by their employers, compared with only 16% of men. That discrepancy is due in part to the fact that women are twice as likely as men to work in part-time contract jobs, and many employers don’t offer retirement benefits to their part-time employees.
Read more: Retirement planning: A step-by-step guide
That’s a sticky problem.
“Unfortunately, when workers do not have access to an employer-sponsored plan, they often don’t act on their own,” Angela M. Antonelli, executive director of the Center for Retirement Initiatives at Georgetown University, told Yahoo Finance.
Only a fraction of workers take the steps to open up a retirement savings account if their employer does not provide one. If a worker has access to an employer-sponsored plan, participation jumps to 72%. And, if they’re auto-enrolled, it jumps to more than 90%, according to Antonelli.
Saving for retirement when you’re on your own
Whether you’re a newly minted college graduate, a baby boomer not quite ready to retire completely, or a worker over 50 still wanting to work full-time, not having an employer-provided retirement account can have serious consequences for retiring comfortably one day.
I know this trap firsthand. When I was self-employed, I resisted setting money aside to fund my retirement accounts for fear of unexpected bills. Then, some clients were notoriously slow in paying my invoices, so cash flow could be erratic. I frequently pushed saving for retirement as far down the road as I could each year.
And when I was right out of college and freelancing, retirement seemed like a lifetime away, and it was easier to not think about it at all. I convinced myself that I wasn’t making enough to save. That’s still the classic refrain I hear from younger workers.
“The biggest hurdle is the fear of getting started and the paralyzing judgment that you’re doing something wrong,” Ashley Russo, founder of Russo Wealth Management in San Diego, told Yahoo Finance.
No 401(k), no problem
There are ways of saving for retirement that are relatively easy to set up.
There are five basic options: a traditional IRA, a Roth IRA, a simplified employee pension (SEP-IRA), a solo 401(k), and a health savings account (HSA).
Read more: What is the retirement age for Social Security, 401(k), and IRA withdrawals?
Your potential choices with IRAs
“The first thing to think about is really what’s your capacity for savings,” Justin Smith, a fee-only certified financial planner with Savant Wealth Management in Phoenix, told Yahoo Finance.
Most contractors opt for a traditional IRA for the up-front tax break. “Tax-advantaged accounts can make it more affordable to save because you’ll be lowering your tax bill,” Collinson said.
Contributions to traditional IRAs are often tax deductible, but withdrawals in retirement are taxed at the same rates as ordinary income, like wages.
This year, you can contribute up to $7,000 in an IRA — either traditional or Roth, and if you’re over 50, you can do a $1,000 catch-up in addition. So if that is within the capacity for your savings, that’s the easiest way to do it, Smith said.
If you’re self-employed, you can put more of your income away by contributing to a tax-deductible Simplified Employee Pension plan, or SEP-IRA. The contribution limit for a SEP-IRA for 2024 is 25% of your compensation or $69,000 — whichever is less.
“You’re going to have to have a significant amount of earnings, well over a couple hundred thousand dollars, to get that much, though,” Smith said.
A solo 401(k) is a retirement plan for self-employed people without employees (a spouse is an exception).
“This is the option with the most bells and whistles,” Smith said. “You can usually sock away pre-tax, up to 25% of your pay, with a cut-off contribution limit that fluctuates annually. Total contributions to a participant’s account, not counting catch-up contributions for those age 50 and over, cannot exceed $69,000 for 2024. There is a catch-up contribution of an extra $7,500 for those 50 or older, pushing the total allowed to 76,500.
This can be either a pre-tax or Roth arrangement. “This one is if you are really thinking about how can I sock away the most amount of money,” Smith said.
You can open any of these retirement accounts through your local credit union, bank, as well as mutual fund companies and brokerage firms. They’re simple to set up online: enter your bank information, how often you want to invest, and the amount you want to transfer.
Also, states are increasingly offering IRA programs that are open for self-employed people to enroll in. These include Oregon, Colorado, Connecticut, Maryland, Illinois, California, and Virginia.
“While these workers can set up any kind of IRA, there are a lot of choices to make in the private market,” John Scott, director of Pew Charitable Trusts’ retirement savings project, told Yahoo Finance. “In contrast, the state programs provide a simple, easy option so they can start saving quickly.”
As a self-employed freelancer or business owner, you probably have a high-deductible health plan for your medical coverage which opens the door to setting up a health savings account, or HSA.
Health savings accounts can be a way to hike savings for retirement. It’s the only account that lets you put money in on a tax-free basis, build up tax-free, and come out tax-free for qualified healthcare expenses.
The 2024 annual contribution limit for individuals is $4,150. For family coverage, the HSA contribution limit is $8,300. If you are an eligible individual 55 or older, your contribution limit is increased by $1,000.
Your contributions roll over year after year and are yours to take along when you retire or change employers.
Bonus tip: You might also consider using some or all of your tax refund to bump up your nest egg. You can include your retirement account routing information on your 1040 tax return.
Think cruise control
When it comes to hassle-free tax and retirement planning for self-employed workers, repeat this mantra: automate, automate, automate.
Even with the precarious nature of a freelancer’s finances, when you’re disciplined and automate the withdrawals, you can save for retirement one paycheck at a time.
“The most powerful tool we have in finance is time,” Russo said. For those at the start of their careers, the key is to “start saving now,” she said. “Don’t worry about saving large sums; instead, focus on consistency and the power of compounding savings over time.”
A little-known credit
The saver’s credit, a tax credit for eligible retirement savers who save in a 401(k) or similar plan or IRA, is another option. The credit lets you get back some of your retirement contributions as a reduction in your tax bill. It’s worth up to $1,000 ($2,000 if married filing jointly) for taxpayers who contribute to a retirement account.
Your eligibility and the size of your credit vary depending on your income, your filing status, and the amount of your retirement contribution. The 2024 income limit for the saver’s credit is $76,500 for married couples filing jointly, $57,375 for heads of household, and $38,250 for singles and married individuals filing separately.
Stay tuned for a new twist on this choice. In 2027, the saver’s credit will be replaced by the saver’s match, which will provide matching funds from the federal government, which will be deposited directly into savers’ retirement accounts.
For now, if you qualify, go for it — every little bit counts.
“Many people are overlooking this tax credit that makes it easier to save for retirement because it sounds too good to be true,” Collinson said.
Kerry Hannon is a Senior Columnist at Yahoo Finance. She is a career and retirement strategist, and the author of 14 books, including “In Control at 50+: How to Succeed in The New World of Work” and “Never Too Old To Get Rich.” Follow her on X @kerryhannon.
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