For Freelancers, New Federal Help in Saving for Retirement

Gig economy workers lag behind those with traditional jobs in saving for retirement, but parts of a new federal law can help them catch up.

Nontraditional workers — like contractors, freelancers and those working for internet-based platforms, like ride-hailing or delivery companies — often struggle to save for retirement because they lack access to workplace plans available to full-time employees, according to research from the Pew Charitable Trusts. Fluctuating income, short-term expenses and emergencies make it difficult for gig workers to save for longer-term retirement needs, Pew found.

Even though many gig workers are financially savvy, many worry about falling short of money in retirement, Pew found. “They know they should be doing more,” said Alison Shelton, a senior research officer in Pew’s retirement savings project, but they may not have the means.

Much of the Secure 2.0 Act, the retirement law signed by President Biden in late December, focuses on enhancing workplace savings options, but some provisions can also benefit nontraditional workers. Notably, the law introduced a “saver’s match,” a new incentive to help low- and moderate-income workers build a nest egg by providing a direct government contribution to their retirement account. (The option will eventually replace the so-called Saver’s Credit.)

Under the new program, the federal government will deposit a 50 percent match on up to $2,000 of a worker’s contribution to a workplace or individual retirement account — a maximum of $1,000 per person. Eligibility is based on income, and the match is reduced over certain limits. Single filers can earn up to $35,500, and joint filers up to $71,000, and qualify for at least a partial match.

“It’s a more effective way of getting people to save,” said Tim Steffen, director of tax planning at Baird Private Wealth Management.

There are some caveats. The worker’s qualifying contribution can be made to either a traditional or Roth retirement account, but the government match can’t go into a Roth, said Sarah Brenner, director of retirement education at the I.R.A. advisory firm Ed Slott and Company. It must go into another eligible account, like a traditional I.R.A. (Traditional I.R.A.s may offer a tax deduction for contributions, and withdrawals are taxed as income. Roth contributions are not tax deductible, but are tax-free upon withdrawal — as are earnings if certain rules are met, like having an account open for at least five years.)

Still, Ms. Brenner said, the saver’s match may be useful for gig workers who are just starting out, particularly young people whose incomes may be lower. “There’s a lot of opportunity there,” she said.

Unfortunately, the saver’s match won’t become available for another four years while the details are ironed out. So gig workers must figure out how to save without that carrot until 2027.

Nontraditional workers can contribute to an I.R.A. on their own and set up automatic transfers to it from their bank account. (They can get the Saver’s Credit, if they qualify.) Workers are more likely to save if retirement contributions are automatic, said David Certner, legislative counsel with AARP.

Even if workers start by contributing just a few hundred dollars when they can, “it’s just good to get started,” said Spencer Betts, a certified financial planner in Lexington, Mass.

Some Secure 2.0 Act changes that can help nontraditional workers do begin this year. SEP I.R.A.s, short for Simplified Employee Pension Plan, which are often used by self-employed people because contribution limits are higher, can allow workers to make Roth contributions, Ms. Brenner said. But I.R.A. providers will need time to prepare their programs to offer the Roth option, she said, so savers may need to be patient. (Solo 401(k)s, another retirement savings option for self-employed people, already allow Roth contributions.)

Also, states are increasingly offering I.R.A. programs for traditional workers who are ineligible for retirement plans through their employers, and some, like Oregon’s, are open to self-employed people.

Here are some questions and answers about saving for retirement as a gig worker:

How much can I contribute to a traditional or Roth I.R.A.?

For the tax year 2022, you can contribute up to $6,000 ($7,000 if you are 50 or older). For 2023, those limits rise by $500 each, to $6,500 and $7,500. (But you generally don’t qualify to contribute to a Roth, or for a tax deduction for a contribution to a traditional I.R.A., if you make over certain income limits.) The I.R.S. has details.

Who can claim the Saver’s Credit?

The little-known credit lets individual taxpayers get back some of their retirement contributions as a reduction in their tax bill. Your eligibility and the size of your credit vary depending on your income, your filing status and the amount of your retirement contribution. The credit is worth a maximum of $1,000 for single filers and $2,000 for joint filers. For the 2022 tax year, single filers with income of $34,000 or less are eligible ($36,500 for 2023). Married couples filing a joint tax return with income of $68,000 or less qualify in 2022 ($73,000 in 2023).

Can I use a health savings account to save for retirement?

Yes. Many self-employed people have high-deductible health plans that can be paired with tax-favored health savings accounts, or H.S.A.s. Funds contributed can be used for current medical costs, or saved and invested longer term. Funds contributed are tax deductible and grow tax-free. The money is free from federal tax, and from state tax in some states, when withdrawn to pay for medical expenses. After age 65, there’s no penalty for spending the money on non-health items, but the funds are taxed as income.