Mary Pettigrew won’t be socking any savings in a retirement plan for tax year 2024.
Pettigrew, a freelance graphic designer, told me she knows she should be saving for retirement out of every paycheck.
“I simply can’t do it,” she said.
Roughly half of US workers don’t have employer-provided retirement plans that divert money straight from a paycheck into a retirement plan and frequently comes with a matching contribution from an employer.
This is the case for people like Pettigrew — because they’re freelancers and contractors, or they work for small businesses (even their own) that don’t offer a retirement plan. In fact, only one-third of employees at small businesses have access to an employer-sponsored retirement plan, according to the Bipartisan Policy Center.
That’s a problem since only a slim percentage of independent workers open up a retirement savings account on their own.
Read more: Retirement planning: A step-by-step guide
What to do if you’re saving on your own
With the April 15 deadline for making 2024 retirement contributions just around the corner, it’s time to get it done. If you have earned income, you can save for retirement in a tax-advantaged saving option, like an Individual Retirement Account (IRA). More on this in a minute.
Once you (or your accountant) tally up your 2024 income and your tax bill, the opportunities to reduce your taxable income with a contribution to a tax-deferred IRA or solo-401(k) should be enough of a spur to stop procrastinating and start saving.
Learn more: 401(k) vs. IRA: How to choose which is right for you
“A lot of self-employed people are not thinking about this stuff until it’s tax time,” Ed Slott, a certified public accountant in New York and an expert on IRAs. “It might be the only time of the year that they’re focusing on their finances and retirement and taxes. The rest of the year they’re highly focused on their business.”
Slott’s advice to save the scramble: If you’re self-employed, try to set up automatic payments throughout the year into a retirement account.
“Nobody does that,” he said. “But the best advice is to pay yourself first.”
Competing priorities
For Pettigrew, while she has a retirement account built up over decades of running her own business, last year any spare money went elsewhere, and her earnings dropped. She has two kids in college and was hit with caregiving expenses for her father after he had a stroke.
“I wasn’t able to work while I was taking care of him either,” she said. “The truth is, as an independent contractor, it’s hard to have the available cash to contribute.”
Like Pettigrew, many workers without an employer’s plan want to save and understand the need to do so, but day-to-day living costs and immediate demands on their income squash that intention.
“Self-employment comes with income fluctuations that make it difficult to save,” Catherine Collinson, CEO and president of Transamerica Institute, told Yahoo Finance. “Many self-employed individuals are not yet prioritizing retirement savings, and that avoidance can leave them in the lurch. Fewer than half cite saving for retirement as a current financial priority, and even fewer indicate they are consistently saving.”
What’s troubling about this is that 1 in 3 self-employed workers expect their primary source of retirement income to come from self-funded savings, according to Transamerica Institute’s new survey. In other words, they plan to live on money they’ve saved — but they aren’t saving enough of it.
Their real retirement plan: Keep on truckin’. More than half of people who are self-employed expect to work to age 70 or older — if they retire at all — and few have a written financial strategy for retirement, Collinson said.
“While it may be tempting for self-employed workers to procrastinate or forego retirement planning altogether, planning to not retire is not a retirement strategy,” she added.
So, what are your choices? For those of you who don’t have a retirement account, it’s simple to set up online at a credit union, bank, mutual fund company, or brokerage firm.
There are five basic options: a traditional Individual Retirement Account (IRA), a Roth IRA (where there is no up-front deduction from your 2024 tax bill, but the gains on your investment are tax-free when you tap it down the road), a simplified employee pension (SEP-IRA), a solo 401(k), and a health savings account (HSA).
Most contractors opt for a traditional IRA for the up-front tax break. Contributions to traditional IRAs are often tax deductible, and 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.
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.
A solo 401(k) is a retirement plan for self-employed people without employees (a spouse is an exception). You can usually sock this away pretax, up to 25% of your pay, with a cut-off contribution limit that fluctuates annually. This can be either a pretax or Roth arrangement.
“A Roth doesn’t have the immediate tax deduction this year, but they are a good way to pile away a lot of money in these accounts on your own,” Slott said.
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.
Learn more: What is a health savings account (HSA)?
Health savings accounts can be a clever way to hike savings for retirement. It’s the only account that lets you put money in on a tax-free basis, build it up tax-free, and take it 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.
Higher expenses for do-it-yourself retirement savers
Many individual IRAs charge steeper fees than most employer plans do — even for identical investments.
Here’s why: Employer plans typically charge lower institutional share class fees. Your IRA invested in the same mutual funds are usually sold as individual or retail investments likely to have higher retail share class fees. It’s like paying retail vs. wholesale prices.
But most people don’t look at fees when making decisions about how to invest their IRA contribution.
“Even a small difference in fees can have a big impact on retirement savings,” John Scott, director of The Pew Charitable Trust’s retirement savings project, told Yahoo Finance. “A slightly higher fee difference can have an outsized effect on your retirement savings over time, much like compounding does.”
Expense ratio is a fund’s annual costs for expenses such as managing the fund, marketing, and more as a percentage of its holdings. A fund, for instance, that charges 0.20% will cost you $20 per year for every $10,000 you have invested.
That makes shopping for the lowest-cost options imperative. You can find a fund’s expense ratio on its profile on the fund company’s website or in the fund’s prospectus.
Low-cost investment options
Market-tracking index funds and target-date funds tend to have cheaper expense ratios than actively managed mutual funds.
When 401(k) plan sponsors automatically enroll workers in a retirement plan, the majority use target-date funds. These funds are typically made up of a couple of index funds.
You pick the year you’d like to retire and buy a mutual fund with that year in its name, like Target 2035. The fund manager then splits your investment between stocks and bonds, shifting to a more conservative mix as the target date nears.
It’s set-and-forget investing for what can stretch to decades and a go-to for folks who know they need to invest but don’t want to have to make any big decisions. Some of the biggest target-date fund families include Fidelity, T. Rowe Price, and Vanguard, though most financial institutions offer them.
As a result of that extra set of eyeballs monitoring the investment allocations, target-date funds can be notch more expensive than a single equity index fund.
The average net expense ratio for target-date funds is 0.84%, per Morningstar Direct’s most recent research.
Vanguard currently has an average charge of 0.08% for its target-date funds. Vanguard 500 Index Fund Admiral Shares, however, have an expense ratio of .04%.
“In today’s market, expense ratios under 0.10% (10 basis points) are considered low,” Mark Johnson, an investments and portfolio management professor at Wake Forest University, said.
As for Pettigrew, she should be back on track in 2025. “It’s conceivable that I could start saving for retirement again this year,” she said. “I recently started a new project, and I have financial stability again.”
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 Bluesky.
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