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Is a Self-Employed 401k the Best Retirement Savings Plan for Freelancers?

  • By Arthur McMahon
  • February 11, 2021

When it comes to planning for retirement, freelancers are left to their own devices. There’s no employer plan to sign up for, no deposit matching, and no stock options. Freelancers have to fund themselves, and for most, the best retirement tool is a self-employed 401k.

What is a Self-Employed 401k?

A self-employed 401k is a unique saving plan designed for individual business owners without any employees. While a small percentage of freelancers may be able to afford a number of common-law employees, the vast majority are sole-proprietors who manage every aspect of their business themselves. Hence, most freelancers are eligible for a self-employed 401k plan.

Functioning much like a traditional 401k, but with added benefits for solopreneurs, a self-employed 401k allows freelancers to contribute pre-tax earnings both as an employer and an employee. This enables a freelancer to contribute much more of their savings toward tax-deferred investments for their retirement.

You may also see a self-employment 401k called a one-participant 401k, solo 401k, or individual 401k.

Why a Self-Employed 401k is the Best Choice for Freelancers

As previously stated, self-employed 401ks are designed for individual business owners, but the most important aspect of this plan is that you can contribute to it in two separate ways. For 2021, you can make salary deferral contributions up to the lesser of  $19,500 or 100% of your income. And, if you’re aged 50 or older, you can make additional “catch-up” contributions of $6500 each year.

Then, as your own employer, you can make an additional contribution of up to 25% of your net self-employment income for a total maximum contribution amount of $58,000 in 2021. These limits tend to rise with each advancing year. 

What’s more, there is one exception to the “no employees” rule. If your spouse earns income from your freelancing business, say as an administrative assistant or accountant, then they can contribute to the plan as well which will double the potential retirement savings.

Tax Advantages of a Self-Employed 401k

You have the option of choosing whether your method of tax savings, and you can receive benefits both as an employee and an employer.

For one, so long as your business isn’t incorporated, you, as an individual employee, can deduct your contributions to reduce your personal income. This, effectively, lowers your taxable income on your tax returns and could drop you into a lower tax bracket. This also means that your retirement withdrawals will be taxed as normal income.

On the flip side, you could choose to use a Roth self-employed 401k plan in which you won’t get the immediate income-reducing tax break, but your withdrawals in retirement will be tax-free. The Roth plan is generally the way to go if you expect to make more money in retirement than you will prior to retirement.

Among the many important tax deductions that freelancers should be aware of, it is possible to deduct your contributions as a business expense if your business is incorporated. Of course, most modern online tax platforms will catch the bulk of these tax benefits for you, it’s always good to be in the know.

How to Open a Self-Employed 401k

It is possible to open a self-employed 401k plan at nearly any brokerage firm that also has standard 401k plans. Both Fidelity and Vanguard, for instance, have step-by-step setup processes in place to help guide you through the actions of setting up your account.

Generally, there are no fees associated with self-employed 401k accounts. You’ll have to fill out some initial paperwork, then deposit your initial funds and choose your investments. Most brokers will have a wide selection of mutual funds, ETFs, and index funds for you to choose from that are safe and reliable investments.

A Self-Employed 401k is Easy to Manage

Has all this talk of taxes and mutual funds got you squirming? Don’t worry — setting up and managing a self-employed 401k is easier than it looks. The big brokers have detailed guides to follow as well as customer service representatives available to help by phone or online chat. They want you to invest your money through their platforms, so they’ll want to make it as easy as possible for you to manage.

If you don’t want to worry about your investment accounts at all, though, there are paid services that’ll take care of all of the dirty work for you. Services like Blooom and Facet Wealth use professional investors and advanced algorithms to manage your money for you, investing your contributions with strategy and purpose.

Alternatives to a Self-Employed 401k

It’s true — self-employed 401ks are not the right fit for every freelancer or other small business owner. Here are a couple of alternatives you should consider.


SEP IRA (simplified employee pension plan) is very similar in many ways to a self-employed 401k, but it is the better choice for a freelancer business owner who may at some point take on an employee or two. If you’re a freelancer who is forecasting substantial career growth, you may get to a point in your career where you will want to hire an assistant to manage your day-to-day extraneous responsibilities.

If this sounds like you, a SEP IRA could be the way to go. A SEP IRA allows you to utilize many of the contribution and tax benefits of a self-employed 401k, but it also enables you to provide a 401k benefit to your employees. The catch is that you will have to provide an equal percentage of salary contribution to each employee, including what you give to yourself, but that is the cost of growing your business.

Simple IRA

If freelancing is but a stepping stone to something larger in your future, then a SIMPLE IRA (savings incentive match plan for employees) is your method of future-proofing your business. This retirement savings plan is scalable up to 100 employees and allows for the employees to contribute to their own retirement, making it so that the entire burden does not fall to you, the employer.

With a SIMPLE IRA, though, you will still have to contribute to your employees’ accounts. You’ll be responsible for matching at least 3% of your employees’ contributions or a fixed 2% contribution to all employees regardless of their own contributions.

Funding a Freelancer’s Retirement

At the end of the day, a self-employed 401k is the best retirement plan for a solo freelancer. If you plan to scale your business, though, there are other plans with their own distinct advantages.

Whatever retirement plan you choose, you can rely on AND.CO to track your expenses and send you financial alerts to keep tabs on invoices and subscriptions so that you can invest your money wisely. A penny saves is a penny earned, and we’re dedicated to seeing that you make the most of your freelancing business now and through to retirement.

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