1099 Retirement Plans for Self-Employed Individuals

Independent contractors and freelancers operate without the traditional safety net of employer-sponsored retirement benefits. The absence of a company 401(k) plan places the responsibility of securing a financial future squarely on the self-employed individual. The tax code, however, provides several avenues for 1099 earners to build retirement nest eggs, often with tax advantages that mirror or even exceed those available to W-2 employees. These specialized retirement accounts are designed to meet the unique needs of those who work for themselves, offering flexibility and high contribution limits.

Individual Retirement Arrangements

The most accessible starting point for any individual with earned income is an Individual Retirement Arrangement (IRA). The two primary types are the Traditional IRA and the Roth IRA, each offering a distinct tax advantage. For 2025, an individual can contribute up to $7,000 to an IRA, with an additional $1,000 catch-up contribution allowed for those age 50 and over. This limit applies to the combined total of all Traditional and Roth IRAs an individual owns.

A Traditional IRA allows for tax-deductible contributions, meaning the amount you contribute may be subtracted from your taxable income for the year. The investments within the account grow tax-deferred, and you pay income tax on withdrawals during retirement. The deductibility of these contributions can be limited if you or your spouse are covered by another retirement plan and your modified adjusted gross income (MAGI) exceeds certain levels.

Conversely, contributions to a Roth IRA are made with after-tax dollars and are not deductible. The benefit of a Roth IRA is that qualified withdrawals in retirement are completely tax-free, including both your contributions and all investment earnings. The ability to contribute directly to a Roth IRA is also subject to MAGI limitations. For those whose income is too high, a “backdoor” Roth IRA conversion may be a possibility.

The SEP IRA

A Simplified Employee Pension, or SEP IRA, is a retirement plan designed for self-employed individuals and small-business owners due to its administrative simplicity and high contribution limits. Only the employer—in this case, the self-employed individual—can make contributions. Contributions are calculated as a percentage of your net adjusted self-employment income.

The IRS allows you to contribute up to 25% of your compensation, with a maximum contribution of $70,000 for the 2025 tax year. These contributions are deductible as a business expense, which lowers your overall taxable income for the year.

The SEP IRA also offers funding flexibility, as you are not required to contribute every year. In years where cash flow is tight, you can contribute a smaller amount or nothing at all. This adaptability is well-suited to the often-fluctuating income streams of self-employment.

The Solo 401(k)

The Solo 401(k), also known as an individual 401(k), is a retirement savings tool available exclusively to self-employed individuals with no employees, other than a spouse. This plan is often favored by those who want to maximize their savings potential due to its dual-contribution structure. A Solo 401(k) allows you to contribute as both the “employee” and the “employer,” which can result in a higher total contribution than a SEP IRA at lower income levels.

As the “employee,” you can contribute up to 100% of your compensation, not to exceed the annual salary deferral limit of $23,500 for 2025. If you are age 50 or over, you can make an additional catch-up contribution of $7,500.

On top of your employee contribution, you can also contribute as the “employer.” The employer portion is a profit-sharing contribution of up to 25% of your net adjusted self-employment income. The combined total of both employee and employer contributions cannot exceed the overall limit of $70,000 for 2025.

An advantage of the Solo 401(k) is the option to make Roth contributions for the employee portion of your savings, allowing for tax-free withdrawals in retirement. Furthermore, many Solo 401(k) plans permit plan loans, allowing you to borrow against your account balance if needed, subject to specific repayment rules.

Funding Your Plan

The foundation for determining your maximum contribution to either a SEP IRA or a Solo 401(k) is your net adjusted self-employment income. This calculation begins with your gross self-employment income minus your business expenses. From this net profit figure, you must subtract one-half of your self-employment taxes, which covers Social Security and Medicare. The resulting number is your compensation base for your contribution percentage.

Timing is an important consideration for these accounts. A Solo 401(k) plan must be formally established by December 31 of the tax year, though you have until your tax filing deadline, plus extensions, to fund it. For a SEP IRA, you can both establish the plan and make contributions for a tax year up until your tax filing deadline, including any extensions.

You can also move existing retirement funds into your self-employed plan through a rollover. If you have a 401(k) from a previous employer or an existing IRA, you can consolidate those assets into your new SEP IRA or Solo 401(k). A direct rollover is the simplest method, where the funds are transferred directly from your old custodian to your new one. An indirect rollover involves receiving a check for the funds, which you then have 60 days to deposit into the new retirement account to avoid taxes and penalties.