Retirement plans for the self-employed
Retirement saving for self-employed

If you are looking ahead to retirement down the road, you will need a dependable vehicle to get you there. Chances are, one of these IRS-approved retirement plan options can help you build a growing and secure retirement nest egg.

First, think about how much income you will require in retirement.

Then calculate the amount you’ll need to save each year to reach your goal. A qualified financial planner can provide you with a financial calculator to help you determine the amount, based on a rate of return,

Your risk tolerance, and time horizon. 

Once you have your retirement number in mind, it’s time to select a retirement plan. Here are the leading retirement plan options for business owners and the self-employed:

  • A Traditional IRA.
  • A Roth IRA.
  • A Solo 401(k)
  • A 401(k)
  • A Defined Benefit Plan
Retirement saving for self-employed

A Traditional IRA

The Individual Retirement Arrangement — or IRA — has been a popular starting point for many self-employed Americans for nearly five decades.

If you are leaving a job to start a business, remember that you can roll your existing 401(k) into a new IRA.

The IRA contribution amount has grown steadily over the years. The 2021 limit is $6,000 (7,000 if you’re age 50 or older). For 2022, it’s $6,000.00 (7,000 if you’re 50 or older). 

Traditional IRAs provide an immediate tax advantage because you can typically deduct your contribution. That means you won’t pay any taxes until you withdraw the funds at retirement. (Remember, if you take money from your IRA before age 59-1/2, you may be subject to a penalty fee)

As the name indicates, IRAs are designed for individuals. Employees would need to set up and contribute to their own IRA plan.

A Roth IRA

The Roth IRA is nearly identical to a Traditional IRA, with one key difference. While a traditional IRA gives you a tax deduction for the tax year you contribute, with a Roth IRA, you’ll pay taxes when you contribute. However, when you take money from your account in retirement, the money you withdraw will be tax-free under certain conditions.

IRAs work for solo operators as well as companies with employees.

Consult a financial planner or tax advisor to help you determine whether a Traditional or Roth IRA is best for you. The planner can also identify the qualifications for these plans.

A Solo 401(k)

This plan is a lot like the 401(k) that companies offer to employees. The main difference here is that the Solo 401(k) is for a business owner or self-employed individual without employees. (Although a spouse may participate, if applicable).

One reason the solo 401(k) is a great choice is that sole proprietors can fund the plan as both an employer and an employee. That essentially lets you double your yearly contribution. The maximum contribution amount for 2021 is $58,000. If you are 50 or older, you can put in up to $64,500.00.

For 2022, the ceiling is raised to $61,000, with people 50 and older able to contribute as much as $67,500.00.  

Pre-tax benefits are the same as customary, employer-sponsored 401(k) plans. Referred to by the IRS as a “one-participant 401(k),” these plans can help higher-income solo operators save far more than is possible with a Traditional or Roth IRA.

A Standard 401(k)

The IRS-approved 401(k) retirement plan lets employees contribute pretax income to an individual retirement account. Employers can also make contributions to employee accounts. Typically, employers match employee contributions — capping them at a predetermined percentage. 

Employer contributions are tax-deductible. This can save the company money by reducing business taxes. Plus, offering a retirement plan is attractive to current and potential employees, giving you a smart tool for hiring and keeping talent.

For participating staff members, investments grow tax-free. Employees contribute to their 401(k) via hassle-free payroll deductions. Plus, they can take their assets with them, should they switch jobs.

There are several 401(k) plan options to consider, including a traditional 401(k), a safe harbor 401(k), or a SIMPLE 401(k) plan. To correctly set up a 401(k), you might wish to partner up with an experienced financial planner.


A SEP IRA is another way to contribute a substantial amount of money each year. This plan is ideal for a self-employed person, or a husband and wife.

A SEP IRA is simpler to manage than a solo 401(k). There are fewer administrative requirements without a ton of paperwork. Plus, the IRS doesn’t require annual reporting. However, much like a solo 401(k), you can take advantage of generous contribution limits. For 2022, you can contribute as much as $61,000 — or up to 25% of net self-employment income or compensation. When you retire, withdrawals are taxed as income, similar to a Traditional IRA.

Talk to your investment advisor about the ins and outs of a SEP-IRA plan.

A Simple IRA

The SIMPLE IRA can be a smart choice for many bigger enterprises with as many as 100 people on staff. In contrast to the SEP-IRA, where employers must contribute on their employees’ behalf, a SIMPLE IRA lets your employees make contributions. While employers may need to make a matching contribution, the amount is limited to 3% of employee compensation or fixed amounts of 2% for all of your eligible staffers.

An employer may contribute as much as $14,000 for 2022 ($13,500 in 2021). You can also add an extra $3,000 in catch-up contributions if you are 50 or older. Like a Traditional IRA, contributions are tax-deductible — and you pay taxes as you make distributions during retirement. You can also deduct employee contributions as a business expense.

It’s a good idea to have an investment professional or tax advisor help you compare the benefits and disadvantages of SIMPLE IRAs versus 401(k) plans.

A Defined Benefit Plan

If you work for yourself, a Defined Benefit Plan might be right for you, if you meet the following criteria:

  • You don’t have any employees or you have a few employees
  • You are a high earner with consistent cash flow
  • You want to put a substantial amount of money ($100,000 and possibly much more) into your retirement plan regularly
  • You are interested in receiving a large tax deduction

Unlike the other retirement plans we’ve covered, there are no predefined limits to your contributions. Instead, the amount you can put in is based on how much you will receive when retired, along with your age, and projected returns on your investment.

The Defined Benefit Plan is great for people who have worked hard to build their business and now have enough cash flow to fund a solid retirement plan.

Retirement saving for self-employed

Make the most of your retirement plan. Choosing the right retirement vehicle, and figuring out how to maximize contributions, are two of the most important decisions a self-employed person will make. Many small business owners and self-employed people consult with a qualified financial planner to review the options and run all of the numbers. The right advisor can be an ongoing source of information and ideas as you work your way toward a successful retirement.