How to Save for Retirement Without a Regular Income

The pandemic has changed the way we work. More than a third of the U.S. workforce was freelancing in 2021, according to one Upwork survey. The last few years have also disrupted retirement planning. Recent Northwestern Mutual research found that Americans think they’ll need at least $1.25 million to retire comfortably, a 20 percent increase from what they thought they’d need in 2021.

Leaving a steady paycheck behind has a number of perks, such as unlimited earning potential and the ability to manage your schedule. But an uneven income also creates challenges, like saving for retirement. When you have a steady paycheck, it can be easier and more predictable to automate retirement contributions to a plan provided through work.

When you’re freelancing, or if you own your own business, you’re likely on your own. The good news is that there are many options to help you to save for retirement.

Retirement accounts for people with irregular income

Whether you have fluctuating income or don’t have access to an employer-sponsored retirement account, you can always turn to a traditional IRA and, depending on your income, a Roth IRA. But these accounts tend to have fairly low contribution limits. The good news is that there are a number of additional options available.

1. Solo 401(k)

This type of retirement account mirrors a traditional 401(k), but it is designed for solo business owners who don’t have any employees. The money you put in is tax-deductible — and since you’re self-employed, you can make contributions as both the employee and the employer.

For 2023, you can kick in up to $22,500 as an employee ($30,000 if you’re 50 or older). As the employer, you can contribute up to 25 percent of your compensation. Total contributions cap at $66,000, excluding catch-up contributions.

2. Spousal IRA

“If you aren’t earning any income and your spouse is, he or she can contribute on your behalf to an IRA in your name,” says Jennifer Raess, planning experience integration lead at Northwestern Mutual.

That’s ideal for folks who’ve temporarily stepped out of the workforce and don’t have any earned income. To qualify for a spousal IRA, you must have a working spouse and file your federal income tax return jointly. You can then open a traditional IRA or Roth IRA (if you earn too much money, you may not be able to contribute to the Roth) and have your partner fund it for you. In 2023, you can contribute up to $6,500 across all your IRAs ($7,500 if you’re 50 or older). That doesn’t include contributions your spouse makes to his or her own IRA.

3. SEP (Simplified Employee Pension) IRA

A SEP IRA is a retirement account specifically for self-employed workers. It has more generous contribution limits when compared to other IRAs. They have the same tax benefits as traditional IRAs, but you can funnel up to $66,000 (in 2023) or 25 percent of your pay, whichever is less, into a SEP IRA. Contributions are also tax-deductible. The high contribution limits make SEP IRAs particularly attractive if you have fluctuating income because you could contribute a large amount one year and then scale back during lean times.

One important note if you have employees: If you opt for a SEP IRA for yourself, you’ll have to offer the same percentage contribution to eligible employees. If, for example, you contribute 20 percent of your compensation to your SEP IRA, you’ll have to top off each qualifying employee’s IRA with 20 percent of their compensation.

4. SIMPLE (Savings Incentive Match Plan for Employees) IRA

A SIMPLE IRA is similar to a solo 401(k) in that you can make contributions as both the employee and the employer. You can put in up to $15,500 in 2023; $19,000 if you’re 50 or older. That’s a big jump from traditional and Roth IRAs contribution limits.

To qualify for a SIMPLE IRA, you must have fewer than 100 employees. Workers can make their own contributions to their accounts. As the employer, you’re typically required to provide a match — either 2 percent of the worker’s pay or a dollar-for-dollar match of up to 3 percent of their compensation.

5. Regular Brokerage Account

Brokerage accounts don’t offer the same tax benefits as many retirement accounts, but they still have their place. These types of taxable accounts allow you to invest in all kinds of assets, without contribution limits or distribution rules. You can kick in as much as you want and take your money out whenever you please. However, investment gains are usually taxable.

A regular brokerage account probably isn’t the best place to build the bulk of your retirement nest egg, but it can help complement your other retirement accounts — especially if you have irregular income.

6. Health Savings Account (HSA)

An HSA lets you set aside pre-tax dollars to cover qualified medical expenses. It offers three unique tax advantages:

• The money you put in is tax-deductible.
• Your money grows tax-free.
• You won’t be taxed on withdrawals that are used for qualified health care expenses.

An HSA can be structured as a cash account or an investment account. This gives you the opportunity to grow your wealth over time. You must be enrolled in a high-deductible health plan to qualify, but the perks can be significant. Once you turn 65, the money in an HSA can be used for anything you like — including retirement income. Just keep in mind that you’ll be taxed on these withdrawals. In 2023, the contribution limit is $3,850 for individuals and $7,750 for family coverage. If you’re 55 or older, you can contribute an additional $1,000 per year.

How much to contribute when you have irregular income

Figuring out how much to save for retirement each month can get tricky when you have an inconsistent income.

“I think a lot of that comes down to budgeting and looking at what your expenses are,” Raess says. “How much money do you have left over at the end of the day, and what’s the minimum amount you could feel comfortable contributing on a regular basis?”

Raess recommends reviewing your income from at least the last year to identify patterns. Are there seasons when you typically earn more? Or slower periods when your income tends to dip? You can use this information to determine your savings target going forward. Either way, try to establish a baseline that works for your budget, and then automate your contributions. You can also increase your automatic contributions during strong seasons.

“Just remind yourself to go back in when your income comes down to adjust that percentage,” Raess says.

Your financial goals, retirement timeline and risk tolerance will also come into play. That’s why Raess drives home the importance of working with a financial advisor, who can run projections, help you navigate irregular income, and guide you toward reaching your retirement goals, making sure that you’re staying on track through both the good and lean years.

All investments carry some level of risk, including the potential loss of principal invested. This publication is not intended as tax advice. Consult with a tax professional for tax advice that is specific to your situation.