What Is the Best Retirement Plan If You Are Self-Employed?

Self-employed individuals must establish and fund their own retirement plans, unlike traditional employees with employer-sponsored options. Various options exist, each with unique features to suit different income levels, business structures, and savings goals. Selecting the right plan requires evaluating individual circumstances to maximize long-term savings.

Overview of Retirement Plan Options for the Self-Employed

Self-employed individuals have access to several retirement plans, each with distinct advantages and contribution structures. Limits and rules reflect the 2025 tax year, subject to annual IRS adjustments.

A Solo 401(k) is for self-employed individuals and business owners with no full-time employees other than themselves or their spouse. This plan allows contributions as an employee and as an employer. As an employee, individuals can defer up to $23,500. Those 50 or older can add $7,500 ($31,000 total), while those 60-63 can add $11,250 ($34,750 total).

The employer can contribute up to 25% of compensation. For sole proprietors and single-member LLCs, this is about 20% of net self-employment earnings due to tax calculations. Combined employee and employer contributions cannot exceed $70,000 for those under 50. For those 50 or older, the total can reach $77,500, or $81,250 for those 60-63, including catch-up contributions. Solo 401(k)s can be traditional (pre-tax) or Roth (after-tax), offering tax flexibility.

Solo 401(k) plans allow participants to take a loan from their account. The maximum loan amount is the lesser of 50% of the vested account balance or $50,000. These loans require repayment within five years, with payments made at least quarterly, though the repayment period can be extended if the loan is used to purchase a primary residence. If the plan holds assets exceeding $250,000, an annual Form 5500-EZ must be filed with the IRS.

A Simplified Employee Pension (SEP) IRA is primarily funded by employer contributions, suitable for self-employed individuals and small business owners, including those with a few employees. Eligibility requires employees to be at least 21, have worked for the business in three of the last five years, and received at least $750 in compensation. Contributions are made solely by the employer and are tax-deductible.

The maximum contribution to a SEP IRA is the lesser of 25% of the employee’s compensation or $70,000. Unlike Solo 401(k)s, employees cannot make their own contributions, and there are no catch-up contributions for those 50 or older. Contributions are due by the business’s tax filing deadline, including extensions. This plan is known for its administrative simplicity.

The Savings Incentive Match Plan for Employees (SIMPLE) IRA is an option for small businesses with 100 or fewer employees, provided they do not maintain any other employer-sponsored retirement plans. Employees are eligible if they earned at least $5,000 in any two preceding calendar years and expect to earn at least $5,000 in the current year. Employee contributions are salary deferrals, up to $16,500. Those 50 or older can add $3,500 ($20,000 total). For employers with 25 or fewer employees, the limit can be $17,600, with a $3,850 catch-up for those 50 or older.

Employers must contribute to a SIMPLE IRA, choosing between a dollar-for-dollar match up to 3% of compensation, or a non-elective contribution of 2% of each eligible employee’s compensation. This employer contribution is tax-deductible for the business. Withdrawals from a SIMPLE IRA within the first two years are subject to a 25% early withdrawal penalty, higher than the standard 10%.

Traditional and Roth IRAs are retirement savings vehicles self-employed individuals can use. The contribution limit for both is $7,000, with an additional $1,000 catch-up contribution for those 50 or older, totaling $8,000. Traditional IRA contributions may be tax-deductible, reducing current income, and earnings grow tax-deferred. Withdrawals in retirement are taxed as ordinary income.

Roth IRAs are funded with after-tax contributions, offering no immediate tax deduction, but qualified withdrawals in retirement are tax-free. Roth IRA direct contributions are subject to Modified Adjusted Gross Income (MAGI) limits. Single filers can make a full contribution if their MAGI is less than $150,000, with a phase-out up to $165,000. For those married filing jointly, the full contribution limit applies below $236,000 MAGI, phasing out up to $246,000. Unlike Traditional IRAs, Roth IRAs do not have Required Minimum Distributions (RMDs) for the original owner during their lifetime.

Required Minimum Distributions (RMDs) begin for most tax-deferred retirement accounts, including Solo 401(k)s, SEP IRAs, and Traditional IRAs, at age 73 for individuals born between 1951 and 1959. For those born in 1960 or later, the RMD age is 75. RMDs ensure taxes are eventually paid on deferred income.

Factors Guiding Your Retirement Plan Decision

Choosing a retirement plan involves evaluating personal and business factors, aligning them with various plan features and limitations.

Desired Annual Contribution Amount

Desired annual contribution is a primary consideration. Individuals aiming to contribute a substantial sum might find Solo 401(k)s or SEP IRAs more appealing due to higher limits. These plans allow larger annual contributions compared to Traditional or Roth IRAs. If an individual anticipates more modest contributions, a Traditional or Roth IRA might suffice, or serve as a foundational savings vehicle.

Presence of Employees

Employee presence is another differentiating factor. A Solo 401(k) is for business owners with no common-law employees, apart from a spouse who works in the business. If the self-employed individual plans to hire employees, or already has them, the Solo 401(k) may no longer be an option. In such cases, a SEP IRA or a SIMPLE IRA becomes more relevant, as these plans are structured to include employees, requiring the business owner to make contributions on their behalf.

Administrative Complexity Tolerance

Administrative complexity tolerance also influences the decision. SEP IRAs are simplest to establish and maintain, requiring minimal paperwork. Traditional and Roth IRAs are also straightforward, managed by the individual. Solo 401(k)s and SIMPLE IRAs involve more administration, such as adhering to plan rules and potentially filing Form 5500-EZ for Solo 401(k)s once assets exceed a threshold. Individuals who prefer less administrative burden may lean towards simpler plans.

Flexibility and Access to Funds

Flexibility and access to funds can also shape the choice. Some plans, like the Solo 401(k), offer loans, providing funds without taxes or penalties if terms are met. This feature can be valuable for business owners needing capital for personal or business needs. Other plans, like SEP IRAs and SIMPLE IRAs, do not permit participant loans.

Tax Strategy

Tax strategy plays a significant role in determining the most suitable plan. Pre-tax contributions, common in Traditional IRAs, Solo 401(k)s, and SEP IRAs, reduce current taxable income, offering an immediate tax deduction. This strategy is often preferred by those who anticipate being in a lower tax bracket in retirement. Conversely, Roth options, available with Roth IRAs and some Solo 401(k)s, involve after-tax contributions but allow for tax-free growth and withdrawals in retirement. This approach benefits individuals who expect to be in a higher tax bracket during their retirement years.

Business Structure

While business legal structure (e.g., sole proprietorship, LLC, S-Corp) can impact contribution calculations, plan selection primarily depends on desired contribution amount and employee presence.

Establishing Your Self-Employed Retirement Plan

After identifying a suitable retirement plan, establish and fund the account by selecting a financial institution or provider.

Choosing a Provider

Choosing a provider is important. Look for financial institutions (brokerage firms, banks, mutual fund companies) offering the desired self-employed retirement plan. Consider competitive fees, diverse investment options (stocks, bonds, mutual funds, ETFs), and reliable customer service. Comparing providers helps secure a plan that meets financial and administrative needs.

Opening the Account

This involves completing an application, requiring personal information, business details, and tax identification numbers. Documentation varies by plan type and financial institution.

Funding the Plan

Funding the plan builds retirement savings. Contributions can be made through direct deposits, lump-sum transfers, or regular automated transfers. Adhere to annual contribution deadlines, which typically align with the tax filing deadline (including extensions). Timely contributions maximize tax-advantaged savings.

Selecting Investments

Selecting appropriate investments is a responsibility within the plan. While the plan provides the tax-advantaged structure, savings growth depends on underlying investments. Choose from investment vehicles like stocks, bonds, mutual funds, and ETFs, based on risk tolerance and financial goals. Many providers offer tools and resources to assist with investment selection.

Ongoing Administration and Compliance

Ongoing administration and compliance are necessary responsibilities for self-employed retirement plans. Maintain accurate records of contributions, distributions, and investment activity. For certain plans, like Solo 401(k)s, if assets exceed $250,000, an annual Form 5500-EZ must be filed with the IRS. Stay informed about changes to tax laws or plan regulations to ensure compliance and avoid penalties.