Choosing the right self-employed retirement plans depends on your income, business structure, and savings goals. As a self-employed individual, you have several options, each with unique benefits, such as high contribution limits, tax advantages, or flexibility.
Below, we break down the key features of different retirement options for self-employed individuals to help you determine which plan best suits your needs.
Key takeaways
- A Solo 401(k) allows both employer and employee contributions, offering the highest contribution limits and Roth options.
- A SEP IRA is a flexible option for those with fluctuating income since it has no annual contribution requirement.
- A SIMPLE IRA is ideal for self-employed individuals with employees, requiring employer contributions but offering easier management.
- A Roth IRA provides tax-free withdrawals in retirement, making it a great long-term savings tool within income limits.
- A Defined Benefit Plan allows high-income self-employed individuals to make large tax-deductible contributions, offering a structured, pension-like retirement income.
Note that the examples in this article are for illustrative purposes only. For personalized tax and legal advice tailored to your situation, consult a financial advisor or tax professional to ensure compliance and optimize your retirement strategy.
Solo 401(k)
Best for high earners seeking maximum contributions
- Allows both employee and employer contributions
- Higher contribution limits than individual retirement accounts (IRAs)
- Offers Roth and traditional options
Solo 401(k) is ideal for self-employed individuals or business owners with no employees (except a spouse) who want high contribution limits and both traditional and Roth tax options.
How it works
A Solo 401(k) works like a traditional 401(k) but is designed for self-employed individuals with no employees (except a spouse). You contribute both as an employee and employer, allowing for higher savings. You can choose to pay taxes now (Roth) or later (traditional), giving you flexibility in how your retirement savings are taxed.
Potential tax benefits
A Solo 401(k) helps lower your taxable income since contributions are tax-deductible. Your savings grow tax-free until retirement, and Roth options let you withdraw money tax-free later. As both employer and employee, you can maximize tax benefits.
Contribution limits
A Solo 401(k) is one of the most powerful self-employed retirement accounts, allowing you to contribute both as an employer and an employee, maximizing tax-advantaged savings.
- Employee contribution: Up to $23,500 in 2025 (or $31,000 if you’re 50 to 59 Individuals who are 50 to 59 by the end of the calendar year can make annual catch-up contributions of up to $7,500. Under SECURE 2.0, employees aged 60 to 63 can make higher catch-up contributions. In 2025, the limit increased to $11,250 from $7,500. ).
- Employer contribution: Up to 25% of net earnings from self-employment, with a total maximum of $69,000 (or $76,500 for those aged 50 to 59).
For example, if you’re 40 and self-employed, you can maximize your Solo 401(k) in 2025 by contributing $23,500 as an employee. With $100,000 in net earnings, you can add 25% ($25,000) as an employer, totaling $48,500 in retirement savings, all while lowering your taxable income and growing your nest egg.
Now, if you’re 52, you get an extra benefit, a $7,500 catch-up contribution for those 50 to 59. This means you can contribute up to $31,000 as an employee. With $100,000 in net earnings, you can add 25% ($25,000) as an employer, totaling $56,000 in Solo 401(k) savings for 2025. This allows you to take advantage of both high contribution limits and tax savings.
Simplified Employee Pension (SEP) IRA
Best for those with fluctuating income
- Contributions are based on business profits
- No annual contribution requirement
- Higher limits than traditional and Roth IRAs
SEP IRA is best for freelancers, independent contractors, and small business owners who want a simple, flexible plan with high contribution limits but don’t need employee salary deferrals Employee salary deferrals are contributions employees choose to set aside from their paycheck into a retirement plan. .
How it works
A SEP IRA allows self-employed individuals to contribute as an employer. Contributions are based on a percentage of net earnings, and there are no annual funding requirements, making it flexible for those with varying incomes.
You can adjust your contributions based on the performance of your business, which is a significant advantage of SEP IRAs. Additionally, withdrawals in retirement are taxed as ordinary income.
Potential tax benefits
A SEP IRA allows tax-deductible employer contributions, reducing taxable income. Investments grow tax-deferred until retirement, potentially lowering overall tax liability. Taxes are paid upon withdrawal, typically at a lower rate in retirement.
Contribution limits
You can contribute up to 25% of your net earnings from self-employment, with a maximum contribution limit of $70,000 in 2025. Contributions are made by the employer (you) and are tax-deductible.
​​For example, if you’re self-employed and earn $100,000 in 2025, you can contribute 25% of your net earnings, or $25,000, to a SEP IRA. Since you’re both an employer and an employee, your contributions are tax-deductible, reducing your taxable income. If your earnings are high enough, you may contribute up to the $70,000 limit, maximizing your retirement savings while lowering your tax bill.
Savings Incentive Match Plan for Employees (SIMPLE) IRA
Best for self-employed individuals with employees
- Employer contributions required (match or fixed percentage)
- Easier to manage than a 401(k)
- Lower contribution limits than SEP or Solo 401(k)
SIMPLE IRA is suited for self-employed individuals or small business owners with employees who want a low-cost, easy-to-manage retirement plan with mandatory employer contributions.
How it works
A SIMPLE IRA is an employer-sponsored plan for small businesses, including self-employed individuals with employees. Employers must contribute either a matching amount (up to 3% of compensation) or a fixed 2%, regardless of employee participation. Employees can also contribute pre-tax income.
Potential tax benefits
A SIMPLE IRA allows tax-deferred growth, meaning contributions lower taxable income in the year they’re made. Employers can deduct required contributions as a business expense, and taxes are only paid upon withdrawal in retirement, often at a lower rate.
Contribution limits
Employees (including self-employed individuals) can contribute up to $16,500 in 2025, with an extra $3,500 catch-up contribution for those who are 50 to 59 Under SECURE 2.0, employees aged 60 to 63 can make higher catch-up contributions. In 2025, the limit increased to $5,250 from $3,500. . Employers must match up to 3% of compensation or contribute 2% for all eligible employees.
Let’s say you’re a 45-year-old self-employed business owner who set up a SIMPLE IRA for yourself and your employees. In 2025, you can contribute up to $16,500 as an employee. If your salary is $60,000, and you choose the 3% matching option, your employer (which is also you) will add another $1,800. This setup allows you to maximize savings while benefiting from tax advantages.
Now, if you choose the fixed 2% employer contribution option, you must contribute 2% of each eligible employee’s salary, whether they contribute or not.
For example, if you have an employee earning $50,000 per year, you must contribute $1,000 (2% of $50,000) to their SIMPLE IRA. If another employee earns $40,000, your contribution for them would be $800. This structure ensures all eligible employees receive retirement contributions, even if they don’t personally contribute.
Roth IRA
Best for those wanting tax-free withdrawals in retirement
- Contributions made with after-tax income
- Tax-free growth and withdrawals in retirement
- Income limits apply
Roth IRA is great for self-employed individuals of any income level (within IRS limits) who want tax-free withdrawals in retirement and don’t need high contribution limits.
How it works
A Roth IRA is funded with after-tax income, meaning withdrawals in retirement are tax-free as long as certain conditions
The conditions for tax-free Roth IRA withdrawals are:
1. Your account must be opened for 5+ years
2. Your age is 59½ or older.
The exceptions are withdrawals used for first-time home purchases ($10,000 limit), disability, or death.
are met. Contributions are limited by income level, and unlike other plans, there are no required minimum distributions (RMDs)
Required minimum distributions are the minimum amounts you must withdraw from certain retirement accounts each year once you reach a specific age. The IRS requires these withdrawals to ensure that tax-deferred retirement savings are eventually taxed.
, making it a long-term tax-free savings tool. Additionally, Roth contributions (but not earnings) can be withdrawn at any time without penalties.
Potential tax benefits
A Roth IRA lets your money grow tax-free, and you won’t pay taxes on withdrawals in retirement if you meet certain conditions. Since contributions are made with after-tax income, there are no immediate tax deductions, but qualified withdrawals, including earnings, are completely tax-free.
Contribution limits
Individuals can contribute up to $7,000 in 2025 ($8,000 The catch-up contribution for those aged 50 or older is $1,000. if you are 50 years old or older). However, Roth IRA eligibility depends on income limits, while traditional IRA contributions may be tax-deductible based on income and filing status.
Defined Benefit Plan
Best for high-income individuals nearing retirement
- Allows large tax-deductible contributions
- Creates a pension-like income stream
- Requires actuarial calculations and long-term funding commitment
Defined Benefit Plans are designed for high-earning self-employed professionals or business owners seeking self-employed retirement plans that maximize tax-deferred savings and secure a fixed retirement income.
How it works
A Defined Benefit Plan functions like a pension, where self-employed individuals contribute toward a set retirement income. Contributions are based on projected retirement benefits and require actuarial calculations Actuarial calculations estimate how much to save now for future retirement benefits. Experts (actuaries) factor in age, expected retirement age, and life expectancy to estimate the right amount. . It’s best for high earners looking for significant tax-deferred contributions.
Potential tax benefits
Defined Benefit Plans offer significant tax advantages, including tax-deductible contributions that reduce taxable income and tax-deferred growth on investments. They allow higher contribution limits than other retirement plans, making them ideal if you’re a high-income earner looking to lower your adjusted gross income (AGI) Adjusted Gross Income is your total income minus your retirement contributions. It’s used to determine your tax liability and eligibility for tax credits or deductions. . Additionally, they can help with estate planning by allowing you to pass on retirement savings to your beneficiaries with tax benefits.
Contribution limits
Contribution limits for Defined Benefit Plans are based on actuarial calculations and depend on factors like age, income, and desired retirement benefits. For 2025, the maximum annual benefit a participant can receive at retirement is $280,000. Contributions vary but can be significantly higher than other retirement plans, especially for high-income individuals looking to maximize tax-deferred savings.
Choosing the right self-employed retirement plan
Picking the best retirement plan for the self-employed will depend on your income, business structure, desired contribution limits, and administrative complexity. Here’s a breakdown to help you decide:
1. Consider your business type and income
- Sole proprietors and small business owners often benefit from a SEP IRA or Solo 401(k).
- Higher-income self-employed individuals may benefit from a Defined-Benefit Plan.
- Freelancers with variable income may benefit from a Roth IRA or Traditional IRA.
2. Compare retirement plan options
Feature | Solo 401(k) | SEP IRA | SIMPLE IRA | Roth IRA | Defined-Benefit Plan |
|---|---|---|---|---|---|
Max contribution (2025) | Up to 25% of net earnings (max $70,000) | $7,000 ($8,000 if 50 or older) | Based on actuarial formula | ||
Employer required? | No (if no employees) | Yes | Yes | No | Yes |
Administrative complexity | Moderate | Low | Low | Very low | Very high |
Best for | High earners, solo entrepreneurs | Self-employed with no employees | Small businesses with employees | Tax-free growth & withdrawals | Those wanting a pension-style plan |
3. Ask key questions
- How much do I want to contribute? Higher-income earners may prefer Solo 401(k).
- Do I have employees? If yes, consider SIMPLE IRA.
- Do I want tax advantages now or later? Roth IRA for tax-free withdrawals, others for tax-deferred growth.
- Do I want a simple or complex plan? SEP IRA and SIMPLE IRA are easy, while Defined Benefit Plans require more administration.
4. Consider the best plan based on your needs
- Best for high contributions: Solo 401(k) or Defined-Benefit Plan
- Best for low maintenance: SEP IRA
- Best for business owners with employees: SIMPLE IRA
- Best for long-term tax-free growth: Roth IRA
No matter your income level or business type, there are self-employed retirement accounts designed to help you save for the future. Be sure to choose the right financial institution to support your plan.
Frequently asked questions (FAQs)
A SEP IRA offers higher contribution limits and flexibility but only allows employer contributions. A SIMPLE IRA allows both employer and employee contributions but has lower limits and requires employer matching.
You can withdraw from a Solo 401(k) or SEP IRA without penalty at age 59½. Early withdrawals may incur a 10% penalty plus taxes unless an exception applies. See the exceptions to tax on early distributions on the IRS website1.
Yes. If you earn self-employment income from your side hustle, you can qualify for a Solo 401(k), SEP IRA, or SIMPLE IRA, even if you have a full-time job with a 401(k). Your contribution limits will depend on your earnings and any other retirement plans you participate in.
Yes, a self-directed Solo 401(k) or IRA allows you to invest in real estate and other alternative assets. However, IRS rules apply, including restrictions on self-dealing and prohibited transactions.
A Solo 401(k) allows the highest contributions for self-employed individuals, with a limit of up to $69,000 in 2025 (or $76,500 if age 50 to 59 $80,250 if age 60 to 63 under a change made in SECURE 2.0 ) through both employee and employer contributions.
If you over-contribute to your retirement plan, you may face penalties and taxes. Excess contributions must be withdrawn by the tax filing deadline (including extensions) to avoid a 6% excise tax per year on the excess amount. If you fail to correct it in time, the funds may also be subject to income tax and potential early withdrawal penalties.
Reference
1 IRS, “Exceptions to tax on early distributions”, irs.gov
