5 Types of Self-Employed Retirement Plans: Know Your Options

Self-employed retirement plans provide ways of saving towards retirement with tax benefits that can save you a lot of money.
self-employed retirement plans

Self-employment comes with a huge amount of benefits. You set your own schedule, you answer to no one but yourself, and you can choose where to work from. However, you also lose out on a lot of the pros of being employed by a company. Aside from a constant salary to rely on, perhaps the biggest thing you miss out on is a retirement plan.

Retirement plans provide ways of saving towards retirement with tax benefits. When you’re employed by a company, you most commonly have a 401(k) that is taken care of by the HR department. You don’t have to think too much of it, but you know it is there and that you can rely on it.

Self-employment means doing it all yourself, and that includes setting up your own retirement plan. The good news is that there are many retirement options, including a SIMPLE IRA retirement plan. But you need to know about what is available and which may be right for you.

To help you decide on the type of retirement plan that will suit you, here are the most popular options.

1. Traditional or Roth IRA

The traditional IRA is most similar to the 401(k) you would get from an employer. You make contributions every month from your earnings before tax is taken. There are contribution limits because the traditional IRA is meant for people who are not earning huge sums of money.

That is not to say a traditional IRA is only for low-income earners. Contribution limits are as much as $6,000 a year. However, if your endeavor has really taken off and you are on your way to becoming a top earner, you will need to choose another option.

A traditional IRA is meant for self-employed people with no employees. You can still use a traditional IRA if you have employees, but it does not account for them and they will have to set up their own plans.

The Roth IRA (and this is true for all Roth retirement plans) allows you to make your contributions after tax is deducted, making your retirement income free from tax. This is good for people who expect their income to be much higher (and therefore in a higher tax bracket) at retirement age.

2. Solo 401(k)

A solo 401(k) is a plan you can take out as a self-employed person with no employees. If you do have employees, you may as well skip to the next option. A solo 401(k) also differs from a traditional IRA in that the contribution limits are much, much higher. In 2022, the contribution limit is $61,000 per year or 100% of your income (whichever is less). If you are over 50 and trying to catch up, you can add a $6,500 contribution each year.

The solo 401(k) is perfect for people who want to save large chunks of money for retirement, or at least have the option to do so. Many self-employed people find their earnings fluctuate greatly from one year to another, and may contribute the maximum one year while contributing a minimal amount the next.

While you can’t contribute to a solo 401(k) if you have employees, you can hire your spouse as an employee and include their contributions. There is also a Roth option if you want to contribute after tax is taken.


A Simplified Employee Pension (SEP) IRA is an easier option to set up than a solo 401(k). It also allows you to make contributions for your employees. Your contributions for them need to be equal to your contributions for yourself, and so this may not be ideal if you have a lot of employees and want to contribute high amounts.

Like a solo 401(k), the SEP IRA has high contribution limits ($61,000 in 2022). But this needs to make up at most 25% of your net self-employment earnings, unlike the solo 401(k) which lets you contribute 100%.

There is no Roth version of the SEP IRA, and your distributions will therefore be taxed in retirement.


If your business is fairly large, with up to 100 employees, you may opt for the SIMPLE IRA. A SIMPLE (Savings Incentive Match Plan for Employees) IRA lets you contribute up to $14,000 a year, with contributions made before tax. You contribute towards your employee accounts as well, but they can contribute themselves through salary deferral.

The SIMPLE IRA was created to provide a simplified option to business owners. For this reason, it is fairly inflexible. Contribution limits are low and early withdrawals are penalized.

5. Defined Benefit Plan

A defined benefit plan is the most similar to a classic pension plan. You can contribute high figures every year before tax, building a significant fund for post-retirement income. There are downsides to this plan. They’re expensive to set up, especially if you have employees, and few brokerages offer them.

The above plans should give you an overview of your options as a self-employed individual. Whatever you choose, make sure you start saving as soon as possible, so that you are best set for your future.

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