This tax move is a ‘game changer’ for freelancers and gig economy workers, advisor says

If you’re a freelancer or contract worker, there are still ways to lower your 2022 tax bill — including contributions to a retirement plan improved by legislation passed in December.

One of the provisions from Secure 2.0 included a change to solo 401(k) plans, designed for self-employed workers (and possibly spouses) or business owners with no employees. 

Like standard 401(k) plans, there’s a deduction for pretax solo 401(k) contributions. But since solo 401(k) account owners can make deposits as both the employee and employer, there’s a chance to save more. 

Before 2022, you needed to open a solo 401(k) by Dec. 31 for current-year deposits. But Secure 2.0 extended the deadline, allowing you to establish a plan after the end of the taxable year and before your filing due date.

“It was a huge game changer for us when we saw that come through,” said Tommy Lucas, a certified financial planner and enrolled agent at Moisand Fitzgerald Tamayo in Orlando, Florida.

Previously, when single-employee businesses wanted to open a retirement plan after the calendar year, Lucas may have opted for simplified employee pension plans, also known as SEP individual retirement accounts, or SEP IRAs, another option for self-employed workers.

However, since the recent legislative change, his company “almost always” picks the solo 401(k) because clients may have the ability to contribute more.

For 2022, you can contribute the lesser of up to $20,500, or 100% of compensation into a solo 401(k) as an employee. (You can save $6,500 more if you’re 50 or older.) Plus, on the employer side, you can contribute up to 25% of compensation, for a plan maximum of $61,000.

By contrast, SEP IRA contributions can’t exceed 25% of the employee’s compensation or up to $61,000 for 2022.

Previously, you could make employer contributions after the tax year ended if the solo 401(k) was already open. Secure 2.0 approved retroactive solo 401(k) account openings in 2023 while still allowing employer contributions by the tax deadline.

By the 2024 tax season, you’ll also be able to make 2023 employee deferrals into your solo 401(k) after the tax year ends, according to John Loyd, a CFP and owner at The Wealth Planner in Fort Worth, Texas. He is also an enrolled agent. 

Of course, picking the right retirement plan may depend on other factors, such as future employees or plan rules. “But it’s mostly dependent on their net income,” he said.