Best Retirement Plans for 1099 Employees

Independent contractors and other self-employed professionals are responsible for funding their own retirement. Workers who receive a Form 1099-NEC instead of a W-2 have significant flexibility and control over their financial future. The available retirement savings plans offer tools for building wealth, each with features tailored to different income levels and goals.

Exploring IRA-Based Retirement Plans

SEP IRA

A Simplified Employee Pension (SEP IRA) allows self-employed individuals to make substantial, tax-deductible contributions. The plan is funded with “employer” contributions, where the individual is their own employer, making it a straightforward option.

Contributions are made to a traditional SEP IRA, meaning they grow tax-deferred until withdrawal. Recent legislation also introduced a Roth option for SEP IRAs. If the plan provider allows, you can elect to have contributions treated as after-tax Roth contributions for tax-free withdrawals in retirement.

You can contribute up to 25% of your compensation, with a maximum of $70,000 for 2025. This calculation starts with your gross self-employment income, from which you subtract one-half of your self-employment taxes.

The SEP IRA is well-suited for high-earning individuals who desire simplicity. You are not required to contribute every year, which is an advantage for those with fluctuating incomes, but the plan lacks a catch-up contribution for those age 50 and over.

SIMPLE IRA

The Savings Incentive Match Plan for Employees (SIMPLE IRA) allows for both “employee” and “employer” contributions, making its structure feel more like a traditional 401(k). As the employee, you can contribute up to $16,500 in 2025.

If you are age 50 or older, you can make an additional catch-up contribution of $3,500. A provision allows individuals aged 60, 61, 62, and 63 to make a higher catch-up contribution of $5,250.

As the employer, you have two choices for your contribution. You can make a matching contribution up to 3% of your compensation or a non-elective contribution of 2% of your compensation.

A SIMPLE IRA is often chosen by a self-employed individual who may hire employees. The plan’s rules are designed to accommodate staff by requiring the owner to contribute for them under the same terms, providing a scalable framework.

Traditional and Roth IRA

Any individual with earned income can contribute to a Traditional or Roth IRA, which can serve as a foundational or supplementary savings vehicle. For 2025, the maximum contribution to all of your IRAs combined is $7,000, or $8,000 if you are age 50 or older. These limits are subject to income phase-outs.

A Traditional IRA offers a potential upfront tax deduction on contributions, and the investments grow tax-deferred. A Roth IRA provides no initial tax break, but qualified withdrawals in retirement are tax-free. Using one of these IRAs can be a starting point for retirement saving or a way to add tax diversification to your strategy.

The Solo 401(k) Option

The Solo 401(k), or individual 401(k), is a retirement plan for self-employed individuals with no employees other than a spouse. It allows the owner to contribute in two capacities: as the “employee” and as the “employer.”

As the employee, you can contribute 100% of your compensation up to the annual limit of $23,500 in 2025. Those age 50 and over can make additional catch-up contributions of $7,500. A higher limit of $11,250 is available for individuals aged 60, 61, 62, and 63.

On top of that, you can make a separate profit-sharing contribution as the employer, limited to 25% of your net adjusted self-employment income. The combination of employee and employer contributions cannot exceed the overall limit of $70,000 for 2025. For example, a 45-year-old consultant with $120,000 in net income could contribute $23,500 as the employee and an additional $24,000 (20% of $120,000) as the employer, for a total of $47,500.

A significant advantage of the Solo 401(k) is the availability of a designated Roth option for the employee contribution. This allows you to direct your salary deferral into a Roth account within the 401(k) for tax-free growth and withdrawals.

Unlike an IRA, a Solo 401(k) plan can also allow for participant loans. This feature permits the business owner to borrow from their retirement account balance, subject to certain rules and limits, providing a source of liquidity.

Key Factors in Choosing Your Plan

Your Income and Savings Goals

Your income level is a primary driver in selecting a plan. The Solo 401(k) and SEP IRA have the highest contribution ceilings, both allowing up to $70,000 in 2025. The Solo 401(k) often allows for a larger total contribution at lower income levels due to its dual contribution structure. For more modest incomes, a Traditional or Roth IRA can be an excellent starting point, while a SIMPLE IRA offers a balance between contribution potential and moderate income requirements.

Desire for Administrative Simplicity

For those who prioritize ease of use, the SEP IRA is the most straightforward option, requiring a simple document to establish. A Solo 401(k) involves more administrative work, as plan documents are more complex, and you may need to file Form 5500-EZ with the IRS annually once assets reach $250,000. The SIMPLE IRA falls in the middle, with clear rules but more required actions regarding mandatory employer contributions.

Plans for Future Hiring

Your business’s growth trajectory can disqualify certain plans. The Solo 401(k) is limited to an owner-only business, which can include a spouse. If you intend to hire full-time employees, you cannot use a Solo 401(k) and would be forced to terminate it. If you anticipate bringing on staff, a SEP IRA or a SIMPLE IRA is a more appropriate choice. A SEP IRA requires you to contribute the same percentage of compensation for eligible employees as you do for yourself, while a SIMPLE IRA is explicitly designed for small businesses with employees.

Interest in Roth Contributions or Loans

If making Roth contributions is a priority, the Solo 401(k) is the superior choice among business-specific plans due to its higher contribution limits compared to a Roth IRA. The ability to take a loan from your retirement funds is a feature unique to the Solo 401(k). IRAs, including SEP and SIMPLE IRAs, are legally prohibited from offering plan loans, making the Solo 401(k) loan provision a useful tool for a business owner who may need access to capital.

Establishing and Funding Your Plan

Select a Provider

The first step is to choose a financial institution to hold the account, such as a brokerage firm, mutual fund company, or bank. Base your choice on factors like investment options, account fees, and customer service. Select a provider that offers a wide range of low-cost investment choices, such as index funds and ETFs, to allow your capital to grow efficiently.

Complete the Application

After selecting a provider, you must complete the plan establishment documents. For a SEP IRA, this is often a simple plan agreement. A Solo 401(k) or SIMPLE IRA will involve a more detailed adoption agreement that outlines the specific features of your plan, such as including a Roth option or loan provisions in a Solo 401(k).

Fund the Account

The final step is to move money into your new account, often via an electronic transfer from your business bank account. For both Solo 401(k)s and SEP IRAs, the deadline to fund the account for a prior tax year is your business’s tax filing deadline, including extensions.

The deadline to establish a plan can be earlier. You can establish and fund a SEP IRA up until your tax filing deadline for the year you are contributing. Solo 401(k)s for S-Corporations must be set up by December 31 to make employee contributions for that year.

A recent law allows sole proprietors to establish a new Solo 401(k) up until the business’s tax filing deadline, not including extensions. This change allows both employee and employer contributions to be made retroactively for the plan’s first year, providing an opportunity for last-minute tax planning.