ICYMI: IRA Contribution Limits Are Higher This Year
Freelancers, in case you missed it: The Internal Revenue Service (IRS) raised the contribution limits for individual retirement accounts (IRAs) to $7,000 this year for those under age 50. Previously, the cap was $6,500.
Why does this matter? Unlike those who have, say, a 401K plan matched by a corporate employer, most independent contractors are responsible for saving for our own selves to stop working one day. The more we can set aside, the sooner we can call it quits — and the more prepared we’ll be to do so.
If you’re a freelancer over age 50 (more power to you!) you were allotted an additional $1,000 cost-of-living adjustment in 2022, bringing your contribution limit to $8,000.
Let’s dive a little deeper to see why the IRS raises the bar and how freelancers can make the best use of it.
Freelancer IRA contribution limits
“The idea behind the limits is to level the playing field, to a certain extent, between higher earners and lower-paid/lower-earning individuals,” said Jacob Ehrenpreis, owner Preis is Right Accounting and Tax in Spring Valley, New York, noting that the hike applies to both types of IRAs: roth and traditional.
Contribution limits are typically set toward the end of the calendar year for the next year and raises are largely based on inflation, he added.
Why freelancers struggle to save
Freelancers often have a tough time saving for retirement, Ehrenpreis said, but it’s not because they’re lazy or incapable. It’s because they’re busy.
“Much effort goes into the day-to-day effort of soliciting and keeping clients,” he sympathized. Then there’s doing the actual work that’s due, which in some cases is followed by rounds of edits. Not to mention, many independent contractors aren’t exactly rolling in money to set aside, with their incomes ranging from $26.54 to $67.60 in New York.
How freelancers can save for retirement
Ehrenpreis, himself an independent contractor running a small business (just like us!), said he likes to think of saving for retirement as another type of “tax.”
“Just as one puts funds aside to pay estimated tax, so too another percentage should be set aside to fund their IRA,” he explained.
He recommends setting aside a small percentage/dollar amount every month with a twice-annual calculation to see if it’s possible to set more aside.
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