Examples of Retirement Plans for the Self-Employed

Individuals who operate as independent contractors, freelancers, or sole proprietors must establish and fund their own retirement accounts. Unlike traditional employees, this responsibility requires an understanding of the various plans available, each with distinct rules, contribution limits, and strategic advantages.

SEP IRA

A Simplified Employee Pension, or SEP IRA, is a retirement plan well-suited for sole proprietors or small businesses with few employees due to its straightforward administration and flexible contribution requirements. Under a SEP IRA, only the employer—in this case, the self-employed individual—can make contributions. This structure simplifies the process as there are no employee salary deferrals to track.

For 2025, an individual can contribute up to 25% of their compensation, with a maximum contribution of $70,000. For self-employed individuals, “compensation” is defined as net adjusted self-employment income. This involves a calculation that accounts for one-half of the self-employment tax, which effectively means the contribution percentage is closer to 20% of net self-employment earnings.

Establishing a SEP IRA involves completing a plan document, such as IRS Form 5305-SEP, and opening an account at a financial institution. The deadline for setting up and funding the plan is the business’s tax filing deadline, including any extensions, which provides flexibility. Contributions are tax-deductible for the business, and the investments grow on a tax-deferred basis.

If the business owner has employees, they must generally make contributions for any employee who is at least 21, has worked for the business in at least three of the last five years, and has earned at least $750. The contribution rate, as a percentage of compensation, must be the same for all eligible employees, including the owner.

SIMPLE IRA

The Savings Incentive Match Plan for Employees, or SIMPLE IRA, is designed for small businesses with 100 or fewer employees and incorporates contributions from both the employee and the employer. The plan requires a mandatory employer contribution, which can be handled in one of two ways. The employer can make a dollar-for-dollar matching contribution on employee deferrals up to 3% of compensation. Alternatively, the employer can make a 2% non-elective contribution for every eligible employee, regardless of whether they contribute.

For 2025, the employee contribution limit is $16,500. Individuals aged 50 and over can make additional catch-up contributions; the standard amount is $3,500, but for those aged 60 to 63, this limit increases to $5,250. The employer contribution is calculated separately and adds to the total retirement savings. For example, if a self-employed person contributes the maximum employee amount, they would also make an employer contribution based on either the 3% match or the 2% non-elective formula.

Setting up a SIMPLE IRA involves completing either Form 5304-SIMPLE or Form 5305-SIMPLE and establishing individual accounts for the owner and any employees. The deadline to establish a new plan is October 1 for the current year. Contributions for a specific year must be made by the employer’s tax filing deadline.

Solo 401(k)

A Solo 401(k) is a retirement plan designed for self-employed individuals who have no employees, other than a spouse. This plan is often favored by high-income earners due to its high contribution limits and flexible features. It allows the business owner to contribute in two distinct roles: as the “employee” and as the “employer.”

As the employee, the individual can contribute up to 100% of their compensation, not to exceed the annual elective deferral limit of $23,500 for 2025. In addition, the individual can make a contribution as the employer. The business can contribute up to 25% of compensation. The total combined contributions from both roles cannot exceed an overall limit of $70,000 for 2025, not including catch-up contributions.

Individuals age 50 and over can make additional catch-up contributions. The standard catch-up for those 50 to 59 is $7,500. For those aged 60 to 63, a higher catch-up contribution of $11,250 is permitted.

Many Solo 401(k) plans also offer a Roth contribution option for the employee deferral portion and permit plan loans, which are not allowed in SEP or SIMPLE IRAs. A loan is generally limited to 50% of the account balance or $50,000, whichever is less. An informational Form 5500-EZ must be filed with the IRS for any year in which the plan’s total assets exceed $250,000, and a final return is required when the plan is terminated.

Traditional and Roth IRAs

Individual Retirement Arrangements, or IRAs, are foundational accounts available to anyone with earned income and can supplement an employer-sponsored plan. The two main types, Traditional and Roth, are distinguished by their tax treatment. Contributions to a Traditional IRA are often made on a pre-tax basis, meaning the contribution may be tax-deductible, and withdrawals in retirement are taxed as ordinary income.

In contrast, contributions to a Roth IRA are made with post-tax dollars, so there is no upfront tax deduction. The benefit is that qualified withdrawals in retirement, including both contributions and earnings, are completely tax-free.

For 2025, the maximum annual contribution to all of your IRAs combined is $7,000. Individuals age 50 and older can contribute an additional $1,000 as a catch-up contribution. This limit applies to the combined total of any Traditional and Roth IRA contributions you make in a single year.

The ability to deduct Traditional IRA contributions may be limited if you or your spouse are covered by another retirement plan at work. Similarly, the ability to contribute directly to a Roth IRA is subject to modified adjusted gross income (MAGI) limits. For 2025, the ability to make a full Roth contribution phases out for single filers with a MAGI between $150,000 and $165,000 and for joint filers between $236,000 and $246,000.

Defined Benefit Plans

A defined benefit plan is a more complex retirement option that functions like a traditional pension. It is best suited for established, high-income self-employed professionals who are often closer to retirement and want to save a substantial amount of money in a short period. Unlike other plans based on annual contributions, a defined benefit plan promises a specific, predetermined annual benefit to the participant in retirement.

The advantage of this plan is the potential for very large, tax-deductible contributions. The amount that must be contributed each year is calculated by an actuary, who considers factors such as age, expected retirement age, and compensation to determine the annual funding required. The annual benefit is capped by the IRS, with the limit for 2025 being $280,000, which can allow for annual contributions well over $100,000.

These contributions are fully tax-deductible for the business, offering a significant tool for tax reduction. The assets in the plan grow tax-deferred until they are distributed in retirement. The complexity and cost of defined benefit plans are their primary drawbacks, as they require the ongoing services of an actuary to perform annual calculations and ensure the plan remains compliant with IRS funding rules.