Latest / Freelance Careers with Fexingo: Independent Work, Consulting, and Self-Employment / How Freelancers Can Build Wealth Through Tax-Advantaged Accounts
Transcript
- Lucas: You know how every freelancer I talk to says they’re great at billing clients but terrible at saving for the future? Luna: Yeah — I think most of us treat our bank account like a checking account with a side of hope. Lucas: Right. And the data backs that up. A 2024 study from the Freelancers Union found that only 34 percent of full-time freelancers had any retirement savings at all. Compare that to 71 percent of traditional employees. That gap is brutal. Luna: And a big reason is that freelancers don’t have an employer handing them a 401 match or a payroll deduction. You have to set it up yourself, and that feels like a hassle. Lucas: Exactly. But here’s the thing — freelancers actually have some powerful tax-advantaged options that employees don’t. A good accountant once told me that the tax code is weirdly generous to the self-employed, if you know where to look. So today I want to walk through three accounts that can change the math for freelancers: the Solo 401, the SEP IRA, and the Health Savings Account. Luna: Before we dive in — and I know we never interrupt the flow — but this show exists because we don’t run ads. And we want to keep it that way. If you’ve found these episodes useful for your own career decisions, you can support us at buy me a coffee dot com slash fexingo. It’s a simple way to keep this free and ad-free. And it really helps. Lucas: Exactly. So back to it — let’s start with the Solo 401. This is the single most powerful retirement account for a freelancer who makes more than maybe fifty grand a year. In 2025, you can contribute up to 23 thousand dollars as an employee, plus up to 25 percent of your net self-employment income as an employer. Combined, that’s a maximum of 69 thousand dollars for 2025. Luna: Wait — that’s more than a standard 401 for an employee. The employee-only limit is 23, right? Lucas: Yes. But because you’re both the employee and the employer in a Solo 401, you get two contribution buckets. The employee contribution is the same 23k, and the employer profit-sharing contribution is up to 25 percent of your income. So if you have a good year, you can sock away serious money — and it’s all pre-tax, lowering your taxable income dollar for dollar. Luna: That’s huge for someone in a high tax bracket. But what about the SEP IRA? I hear that one mentioned a lot for freelancers. Lucas: SEP IRA is simpler. You can contribute up to 25 percent of your net earnings, capped at 69 thousand dollars for 2025. Same maximum as the Solo 401, but with a catch: if you ever want to do a Backdoor Roth IRA, a SEP IRA gets in the way because of the pro-rata rule. A Solo 401 is easier to pair with a Roth strategy. Luna: Okay, so for a freelancer who wants to do a Backdoor Roth — which is a way to get money into a Roth IRA even if you earn too much for a direct contribution — the Solo 401 is better. Lucas: Correct. And if you’re a high-earning freelancer — say you clear 200k in net income — you can also add what’s called a mega Backdoor Roth. That’s an after-tax contribution to your Solo 401 that you then convert to Roth. In 2025, that can add another 46,000 dollars on top of the 23,000 pre-tax. Total: 69,000. Luna: That’s effectively 69k into tax-advantaged accounts. Most employees can’t do that. Lucas: Exactly. And the third piece is the Health Savings Account. If you have a high-deductible health plan — and most freelancers do because premiums are cheaper — you can contribute up to 4,150 dollars for an individual or 8,300 for a family in 2025. That money goes in pre-tax, grows tax-free, and comes out tax-free if you use it for qualified medical expenses. It’s triple tax-advantaged. Luna: Triple tax-advantaged — there’s nothing else like it in the tax code. And you can invest that money in the market, so it can grow for decades. Lucas: Right. Let me give you a concrete example. A freelance graphic designer I know — let’s call her Sarah — made 120k in net income in 2025. She contributed 23k to her Solo 401, and her employer contribution was 25 percent of 120k minus half her self-employment tax, so roughly 27k. That’s 50k total. She also maxed her HSA at 4,150. Combined, she put away 54,150 in tax-advantaged accounts, reducing her taxable income from 120k to about 66k. She saved roughly 14,000 dollars in federal income tax alone. Luna: That’s a massive savings. And she’s also building wealth for retirement. Most freelancers I know aren’t doing anything close to that. Lucas: No, they’re not. And the main barrier is just setting it up. A Solo 401 takes about 15 minutes at a brokerage like Vanguard or Fidelity. You need an Employer Identification Number from the IRS — that’s free and takes five minutes online. Then you open the account, choose your investments, and set up automatic contributions. Luna: But what about a freelancer who’s just starting out and doesn’t have a lot of extra cash? Are these still worth it? Lucas: Absolutely. Even if you can only contribute a few thousand a year, the tax deduction is immediate. And the compounding over time is enormous. Let’s say a 30-year-old freelancer contributes just 5k a year to a Solo 401 until age 65, earning 7 percent annually. That’s over 700k by retirement — and that’s on a small contribution. Luna: And you can also use a Roth Solo 401 if you want to pay taxes now but have tax-free withdrawals later. That might make sense if you’re in a low tax bracket now. Lucas: Exactly. The Roth option is available in most Solo 401 plans. And if you’re self-employed, you have until your tax filing deadline — including extensions — to make contributions. So for 2025, you have until October 15, 2026, to contribute. That’s a lot of flexibility. Luna: That’s huge — employees have to decide by year-end. Freelancers get almost a full extra year. Lucas: Right. Now, what about the taxable brokerage account? I think a lot of freelancers forget that after maxing retirement accounts, investing in a regular taxable account is still smart. You don’t get the tax deduction, but you get favorable long-term capital gains rates and you can access the money anytime without penalties. Luna: True. But don’t forget about tax-loss harvesting. Freelancers can sell losing investments to offset gains or even up to 3k of ordinary income each year. Lucas: Great point. So the order of operations for a freelancer: first, Solo 401 up to the max or at least enough to get the deduction. Second, HSA if you have a high-deductible plan. Third, if you still have money, consider a Backdoor Roth IRA — that’s 7k for 2025, or 8k if you’re 50 or older. Finally, a taxable brokerage account with a broad market index fund. Luna: And one more thing — if you have a spouse who works in the business, they can also contribute to the Solo 401 as an employee. That doubles the employee contribution limit. Lucas: Yes. That’s a powerful strategy for freelancers with a family business. So to recap: the Solo 401 is the most flexible, the SEP IRA is simpler but can block Roth strategies, the HSA is triple tax-free, and a taxable account is the backup. The key is to start somewhere. Even if you just open a Solo 401 and contribute 1 percent of your income, you’re building the habit. Luna: And the tax savings alone can fund your next year’s contribution. It’s a virtuous cycle. Lucas: Exactly. So my challenge to listeners: before the end of this quarter, get your EIN, open a Solo 401 at a brokerage, and set up a recurring transfer — even if it’s small. Your future self will thank you. Luna: And if you want to support us keeping this show ad-free, the link is buy me a coffee dot com slash fexingo. Every bit helps us keep making episodes like this.