Retirement Plan Options for the Self-Employed
Being your own boss is great, and the retirement plan options when you’re self-employed — like a SEP-IRA or solo 401(k) — can be surprisingly robust.
Not only do you have more options in terms of self-employed retirement plans than you might think, some of these plans come with higher contribution limits and greater tax benefits than traditional plans. That’s especially true since the passage of the SECURE 2.0 Act, which has favorably adjusted the rules of many retirement plans.
Key Points
• Self-employed individuals have robust retirement plan options like SEP-IRA and solo 401(k) with high contribution limits and tax benefits.
• These plans are similar to traditional ones, allowing long-term contributions and investment selections.
• SEP-IRAs are ideal for business owners with employees, offering simplified contributions that are tax-deductible.
• Solo 401(k) plans suit owner-only businesses, allowing substantial contributions as both employer and employee.
• SIMPLE IRAs are designed for small businesses with fewer than 100 employees, enabling both employer and employee contributions.
What Are Self-Employed Retirement Plans?
In some ways, self-employed retirement plans aren’t so different from regular retirement plans. You can set aside money now, select investments within the account, and continue to contribute and invest for the long term.
Similar to traditional retirement plans, you have two main categories most self-employed plans fall into:
• Tax-deferred retirement accounts (e.g traditional, SEP, or SIMPLE IRAs and solo 401(k) plans). The amount you can save varies by the type of account. The money you set aside is deductible, and you don’t pay tax on that portion of your income. You do pay taxes on the funds you withdraw in retirement.
• After-tax retirement accounts (typically designated as Roth IRAs or Roth 401(k) accounts). Here you can also save up to the prescribed annual limit, but the money you save is after-tax income and cannot be deducted. That said, withdrawals in retirement are tax free.
A note about Roth eligibility: Roth IRAs come with income limits. If your income is higher than the prescribed limit, you may not be eligible. Roth 401(k) plans do not come with income restrictions. Details below.
Understanding Beneficiary Rules for Self-Employed Plans
The rules that apply to inherited retirement accounts are extremely complicated. If you’re the beneficiary of an IRA, solo 401(k) or other retirement account, you may want to consult a professional as terms vary widely, and penalties can apply.
Administrative Factors to Consider
When selecting a self-employed retirement plan, it’s important to weigh the set up, administrative, and IRS filing rules. Some plans are easier to establish and maintain than others.
Given that running a plan can add to your overall time and personnel costs, it’s important to do a cost-benefit analysis when choosing a retirement plan when you’re a freelancer, consultant, or small business owner.
💡 Quick Tip: Want to lower your taxable income? Start saving for retirement with a traditional IRA. The money you save each year is tax deductible (and you don’t owe any taxes until you withdraw the funds, usually in retirement).
Types of Self-Employed Retirement Plans
The IRS outlines a number of retirement plans for those who are freelance, self-employed, or who run their own businesses. Here are the basics.
Traditional and Roth IRAs
What they are: One of the most popular types of retirement plans is an IRA — or Individual Retirement Arrangement.
As noted above, there are traditional IRAs, which are tax deferred, as well as Roth IRAs, which are after-tax accounts.
Suited for: While anyone with earned income can open a traditional or Roth IRA, these accounts can also be used specifically as self-employed retirement plans. They are simple to set up; and most financial institutions offer IRAs.
That said, IRAs have the lowest contribution limits of any self-employed plans, and may be better suited to those who are starting out, or who have a side hustle, and can’t contribute large amounts to a retirement account.
Contribution limits. There is no age limit for contributing to a traditional or Roth IRA, but there are contribution limits (and for Roth IRAs there are income limits; see below).
For tax year 2024, you can contribute up to $7,000 annually to either type of IRA, with an additional $1,000 catch-up contribution allowed for people over 50 years old. (For tax year 2023, you may contribute $6,500 per year, $7,500 with the catch-up provision, until April 15, 2024.)
Note that your total annual combined contributions across all your IRA accounts cannot exceed those limits. So if you’re 35 and contribute $3,000 to a Roth IRA for 2024, you cannot contribute more than $4,000 to a traditional IRA in the same year, for a maximum total annual contribution of $7,000.
Income limits: There are no income limits for contributing to a traditional IRA, but Roth IRAs do come with income restrictions. In 2024, that limit is $146,000 for single people (people earning more than $146,000 but less than $161,000 can contribute a reduced amount). For those individuals who are married and file taxes jointly, the limit is $230,000 to make a full contribution, and between $230,000 to $240,000 for a reduced amount.
Tax benefits: The main difference between a traditional vs. Roth IRA is the tax treatment of the money you save.
• With a traditional IRA, the contributions you make are tax-deductible when you make them (unless you’re covered by a retirement plan at work, in which case conditions apply). Withdrawals are taxed at ordinary income rates.
• With a Roth IRA, there are no tax breaks for your contributions, but qualified withdrawals are tax free.
Withdrawal rules: You owe ordinary income tax on withdrawals from a traditional IRA after age 59 ½. You may owe a 10% penalty on early withdrawals, i.e. before age 59 ½. There are exceptions to this rule for medical and educational expenses, as well as other conditions, so be sure to check with a professional or on IRS.gov.
The rules and restrictions for taking withdrawals from a Roth are more complex. Although your contributions to a Roth IRA (i.e. your principal) can be withdrawn at any time, investment earnings on those contributions can only be withdrawn tax-free and without penalty once the investor reaches the age of 59½ — and as long as the account has been open for at least five years (a.k.a. the 5-year rule).
Required Minimum Distributions (RMDs): You are not required to take minimum distributions from a Roth IRA account. You are required to take minimum distributions from a traditional IRA starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.
Solo 401(k)
What it is: A solo 401(k) is a self-employed retirement plan that the IRS also refers to as a one-participant 401(k) plan. It works a bit like a regular employer-backed 401(k), except that in this instance you’re the employer and the employee. There are contribution rules for each role, but this dual structure enables freelancers and solo business owners to save more than a standard 401(k) would allow.
Suited for: A solo 401(k) covers a business owner who has no employees, or employs only their spouse.
Contribution limits:
• As the employee: For 2024, you can contribute up to $23,000 or 100% of compensation (whichever is less), with an additional $7,500 in catch-up contributions allowed if you’re over 50, for a total of $30,500.
• As the employer: You can contribute up to 25% of your net earnings, with separate rules for single-member LLCs or sole proprietors.
Total contributions cannot exceed a total of $69,000, or $76,500 if you’re 50 and over.
You can not use a solo 401(k) if you have any employees, though you can hire your spouse so they can also contribute to the plan (and you can match their contributions as the employer), further reducing your taxable income.
Note that 401(k) contribution limits are per person, not per plan (similar to IRA rules), so if either you or your spouse are enrolled in another 401(k) plan, then the $69,000 limit per person must take into account any contributions to that other 401(k) plan.
Income limits: There is a limit on the amount of compensation that’s allowed for use in determining your contributions. For tax year 2024 it’s $345,000.
Tax benefits: A solo 401(k) has a similar tax setup as a traditional 401(k). Contributions can be deducted, thus reducing your taxable income and potentially the amount of tax you owe for the year you contribute. But you owe ordinary income tax on any withdrawals.
Withdrawal rules: You can take withdrawals from a solo 401(k) without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability (you can find a list of exceptions at IRS.gov), but you may owe a 10% penalty as well as income tax on the withdrawal.
Required Minimum Distributions (RMDs): You are required to take minimum distributions from a solo 401(k) starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.
Simplified Employee Pension (or a SEP-IRA)
What it is: A SEP-IRA, or Simplified Employee Pension plan, is similar to a traditional IRA with a streamlined way for an employer (in this case, you) to make contributions to their own and their employees’ retirement savings. Note that when using a SEP-IRA, the employer makes all contributions; employees do not contribute to the SEP.
Suited for: A key difference in a SEP-IRA vs. other self-employment retirement plans is that it’s designed for those who run a business with employees. Employers have to contribute an equal percentage of salary for every employee (and you are counted as an employee). Again, employees may not contribute to the SEP-IRA.
That means, as the employer, you can not contribute more to your retirement account than to your employees’ accounts (as a percentage, not in absolute dollars). On the plus side, it’s slightly simpler than a solo 401(k) to manage in terms of paperwork and annual reporting.
Contribution limits: For 2024, the SEP-IRA rules and limits are as follows: you can contribute up to $69,000 or 25% of an employee’s total compensation, whichever is less. Be sure to understand employee eligibility rules.
As the employer you can contribute up to 20% of your net compensation.
Note that SEP-IRAs are flexible: Contribution amounts can vary each year, and you can skip a year.
Income limits: For tax year 2024 there is an income cap of $345,000 on the compensation.
Tax benefits: Employer and employees can deduct contributions from their earnings, and withdrawals in retirement are taxed as income.
Withdrawal rules: You can take withdrawals from a SEP-IRA without penalty at age 59 ½ or older. Distributions may be allowed before that time in the case of certain “triggering events,” such as a disability (you can find a list of exceptions at IRS.gov), but you may owe a 10% penalty as well as income tax on the withdrawal.
Required Minimum Distributions (RMDs): You are required to take minimum distributions from a SEP-IRA starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.
New rules under SECURE 2.0: Starting in 2024, SEP-IRA plans can now include a designated Roth option. But not all plan providers offer the Roth option at this time.
💡 Quick Tip: All investments come with some degree of risk — and some are riskier than others. Before investing online, decide on your investment goals and how much risk you want to take.
SIMPLE IRA
What it is: A SIMPLE IRA (which stands for Savings Incentive Match Plan for Employees) is similar to a SEP-IRA except it’s designed for larger businesses. Unlike a SEP plan, individual employees can also contribute to their own retirement as salary deferrals out of their paycheck.
Suited for: Small businesses that typically employ 100 people or less.
Contribution limits for employers: A small business owner who sets up a SIMPLE plan has two options.
• Matching contributions. The employer can match employee contributions dollar for dollar, up to 3%.
• Fixed contributions. The employer can contribute a fixed 2% of compensation for each employee.
Employer contributions are required every year (unlike a SEP-IRA plan), and similar to a SEP, contributions are based on a maximum compensation amount of $345,000 for 2024.
Contribution limits for employees: Employees can contribute up to $16,000 to a SIMPLE plan for 2023, and additional $3,500 for those 50 and up.
Tax benefits: Employer and employees can deduct contributions from their earnings, and withdrawals in retirement are taxed as income.
Withdrawal rules: Withdrawals are taxed as income. If you make an early withdrawal before the age of 59 ½ , you’ll likely incur a 10% penalty much like a regular 401(k); do so within the first two years of setting up the SIMPLE account and the penalty jumps to 25%.
Required Minimum Distributions (RMDs): You are required to take minimum distributions from a SEP-IRA starting at age 73. RMD rules can be complicated, so you may want to consult a professional to avoid making a mistake and potentially owing a penalty.
New rules under SECURE 2.0: Starting in 2024, the federal law permits employers that provide a SIMPLE plan to make additional contributions on behalf of employees, as long as the amount doesn’t exceed 10% of compensation or $5,000, whichever is less. This amount will be indexed for inflation.
Under these new rules, student loan payments that employees make can be treated as elective deferrals (contributions) for the purpose of the employer’s matching contributions.
In addition, SIMPLE plans can now include a designated Roth option, but not all plan providers offer the Roth option at this time.
Defined-Benefit Retirement Plan
Another retirement option you’ve probably heard about is the defined-benefit plan, or pension plan. Typically, a defined benefit plan pays out set annual benefits upon retirement, usually based on salary and years of service.
Typically pension plans have been set up and run by very large entities, such as corporations and federal and local governments. But it is possible for a self-employed individual to set up a DB plan.
These plans do allow for very high contributions, but the downside of trying to set up and run your own pension plan is the cost and hassle. Because a pension provides fixed income payments in retirement (i.e. the defined benefit), actuarial oversight is required annually.
The Takeaway
When you’re an entrepreneur, freelance, or otherwise self-employed, it may feel as if you’re out on your own, and your options are limited in terms of retirement plans. But in fact there are a number of options to consider, including various types of IRAs and a solo 401(k).
Ready to invest for your retirement? It’s easy to get started when you open a traditional or Roth IRA with SoFi. SoFi doesn’t charge commissions, but other fees apply (full fee disclosure here).
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Tax Information: This article provides general background information only and is not intended to serve as legal or tax advice or as a substitute for legal counsel. You should consult your own attorney and/or tax advisor if you have a question requiring legal or tax advice.
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