Retirement Planning For Self-Employed

As a self-employed individual, you may not have access to traditional employer-sponsored retirement plans like a 401(k), but that doesn't mean you can't take control of your financial future. In fact, being self-employed offers unique opportunities for retirement savings and investment strategies. In this guide, we will explore various retirement planning options available to the self-employed, including individual retirement accounts (IRAs), simplified employee pension (SEP) IRAs, solo 401(k) plans, and more. We will discuss the benefits, eligibility criteria, contribution limits, and tax advantages associated with each option. By understanding these retirement planning avenues and tailoring them to your specific needs, you can pursue a comfortable and financially secure retirement as a self-employed individual. Let's dive into the world of retirement planning for the self-employed and take the first steps towards a prosperous future.

Creating a Retirement Plan


There are a few different ways to save for retirement when you're self-employed. One option is to open up an Individual Retirement Account (IRA). IRA's come in two different types: Traditional and Roth. With a Traditional IRA, your contributions grow tax-deferred until you withdraw the funds during retirement. This means you won't be taxed on any investment gains, dividends, or interest earned within the account until you start taking distributions. The maximum contribution limit for a Traditional IRA is $6,000 for individuals under the age of 50 and $7,000 for individuals aged 50 and older (as of 2023). These limits may increase periodically to account for inflation. 

With a Roth IRA, contributions are made with after-tax dollars, meaning you don't get an immediate tax deduction. However, the major advantage of a Roth IRA is that qualified withdrawals during retirement are generally tax-free. This includes both the contributions and any earnings or investment gains accumulated within the account. The maximum contribution limit for a Roth IRA is $6,000 for individuals under the age of 50 and $7,000 for individuals aged 50 and older (as of 2023). 

Unlike a Traditional IRA, Roth IRAs do not have required minimum distributions (RMDs) during the account holder's lifetime. This allows for greater flexibility in retirement planning and potential tax advantages for future generations if the account is passed down as an inheritance. Considering the potential tax-free growth and flexibility in withdrawals, a Roth IRA may be advantageous for individuals who expect their tax rate to be higher during retirement or want to minimize their future tax liabilities.

Solo 401(k)

Another option for saving for retirement is to set up a Solo 401(k). A Solo 401(k) is basically a 401(k) plan for self-employed individuals or those with no employees other than their spouse. Like a traditional 401(k), contributions are made with pre-tax dollars and grow tax-deferred. But there are higher contribution limits with a Solo 401(k)—you can contribute up to $19,500 per year (or $26,000 if you're 50 or older). And if your business makes a profit, you can also make an employer contribution of up to 25% of your self-employment income.


You could also consider setting up a SEP IRA. A SEP (Simplified Employee Pension) IRA is similar to a Traditional IRA, but it has higher contribution limits—up to $57,000 per year or 25% of your net self-employment income, whichever is less. Any self-employed individual, including sole proprietors, independent contractors, freelancers, and small business owners with employees, can establish a SEP IRA. Even if you have full-time employment elsewhere, you can still contribute to a SEP IRA if you have self-employment income. Contributions made to a SEP IRA are tax-deductible, meaning they can lower your taxable income for the year. However, withdrawals during retirement are subject to ordinary income tax. SEP IRAs are relatively simple to administer, making them an attractive choice for self-employed individuals. There are no annual IRS filings required, and the administrative requirements are minimal compared to other retirement plans.

It's essential to note that once a SEP IRA is set up, it becomes an individual retirement account, and contributions are usually invested in various financial instruments like stocks, bonds, mutual funds, or other investment options chosen by the account holder.

Seeking guidance from a financial or tax professional can help you determine if a SEP IRA is the right retirement plan for your specific needs. They can offer personalized instruction based on your financial situation, goals, and eligibility criteria.


A SIMPLE IRA plan (Savings Incentive Match Plan for Employees) is a retirement savings arrangement designed for small businesses without existing retirement plans. It allows both employers and employees to contribute to traditional IRAs set up for employees. Employers can either provide a matching contribution of up to 3% of compensation or a 2% nonelective contribution for eligible employees, even if they don't contribute themselves. Employees can also make contributions. While these plans are easy to establish and operate, they have certain rules and limitations. Employees who earned at least $5,000 in two previous years and expect to earn at least $5,000 in the current year are typically eligible. The plan's operation involves contributions, investment decisions, and annual audits to ensure compliance. Employers can terminate the plan with proper notice. In essence, SIMPLE IRA plans offer a straightforward retirement savings option for small businesses and their employees, emphasizing shared responsibility and ease of setup.

Defined Benefit Plans

There are many different types of retirement plans available to self-employed individuals, but one of the most popular options is the defined benefit plan. This type of plan can offer a number of benefits, including a guaranteed income in retirement, tax breaks, and more.

A defined benefit plan is a type of pension that provides retirees with a guaranteed income in retirement. The payments are based on a set formula that takes into account factors such as the employee's salary history and years of service.

One of the biggest advantages of a defined benefit plan is that it offers a guaranteed income in retirement. This can be a big help in planning for your financial future, as you'll know exactly how much money you'll have coming in each month.

Another advantage of this type of plan is that it often comes with tax breaks. The contributions that you make to the plan may be deductible, and the payments you receive in retirement may be taxed at a lower rate than other forms of income.

If you're self-employed and looking for a retirement savings option that can offer security and peace of mind, a defined benefit plan may be right for you. Talk to your financial professional to learn more about this type of plan and whether it's right for your unique situation.

Benefits and Tax Breaks

One of the biggest benefits of being self-employed is that you can contribute more to your retirement savings than someone who is employed by someone else. For example, in 2020, you can contribute up to $19,500 to a 401(k) if you're self-employed (or $26,000 if you're over 50). Employer-sponsored 401(k) plans have much lower contribution limits - just $6,000 in 2020.

Another big benefit is that you can deduct your retirement plan contributions from your taxes. This can save you a significant amount of money come tax time.

Self-employed individuals can often qualify for catch-up contributions. These are additional contributions that people 50 and over can make to their retirement accounts. For example, in 2020, you can contribute an additional $6,500 to your 401(k) if you're over 50. This can help you make up for lost time in saving for retirement. 

If all of this sounds overwhelming to you, don't worry. A financial professional can help you understand retirement and everything it entails. Attend a retirement seminar in your area, today!