Retirement Plans for Self-Employed People

Traditional IRA vs. Roth IRA for Self-Employed Individuals

This is just your good old-fashioned individual retirement account. Many people use it as a retirement savings supplement even if they have a 401(k)—and anyone can open one. There are two major types: traditional IRAs and Roth IRAs.

In a traditional IRA, contributions are generally tax-deductible and growth isn’t taxed until withdrawal during retirement (withdrawals are taxed at the IRA owner's current income tax rate). Roth IRA contributions are not deductible, but growth isn’t subject to income tax. If you withdraw from either a traditional and Roth IRA before age 59 ½, you’ll likely face tax penalties from the IRS. The annual contribution limits are lower than for 401(k)s—$6,000 instead of $20,500. But those over age 50 are eligible for additional “catch-up” contributions of $1,000 per year.

Simple IRA

Some smaller firms that don’t offer a 401(k) plan set up SIMPLE IRAs on behalf of their employees, who can’t do so independently. SIMPLE is an acronym that stands for Savings Incentive Match Plan for Employees. Owners may also participate. Companies must contribute either 2% of the enrollee’s salary regardless of employee contributions, or match the employee’s contributions dollar-for-dollar fully up to 3% of the worker’s pay. The IRS website is a good resource for more detail on this—or any other—retirement plan option. .

Contribution limits are $14,000 per year, plus another $3,000 in annual “catch-up” contributions for those over 50. They’re simpler to set up and run than 401(k)s, which is why they’re more popular for smaller businesses. But contributions are capped far below those of SEP IRAs.

SEP IRAs

SEP stands for Simplified Employee Pension. Like a SIMPLE IRA, it is designed for small-business owners with one or more employees. Freelancers are also eligible. Though money accrues for employees, employees may not contribute themselves—only employers.

As with a traditional IRA, the money isn’t taxed until withdrawal. SEP IRAs also have a much higher contribution limit than other IRAs—up to $61,000¹ or 25% of compensation, whichever is lower. They are comparatively simple to set up, and allow employers to contribute widely varying amounts each year—a feature companies with fluctuating revenues often appreciate.

Self-Employed Profit-Sharing Plans

These retirement plans share many similarities with SEP IRAs: Employers contribute on employees’ behalf, and companies choose how much they wish to contribute—if profits are suffering, “nothing at all” is an option.

Earnings accrue tax-deferred, and employees are free to use other retirement savings accounts at the same time. There is one main difference: With SEP IRAs, the company can contribute up to 25% of a worker’s salary (as long as it’s $61,000 or less); under profit-sharing plans, the company can contribute up to 25% of its payroll costs to employees as a whole, which means individual workers could receive more than 25% of their salary in plan contributions.

Individual (or “Solo”) 401(k)s

These retirement plans are limited to sole proprietorships (businesses with an owner but no employees), and come in both traditional and Roth versions. The contribution limits are much higher than with standard 401(k)s, because the contributor counts both as an employee and an employer (which have a combined contribution limit of $61,000), plus an additional catch-up allotment of $6,500 each once you hit age 50.

Solo 401(k)s do carry more paperwork than SEP IRAs, though, and many custodians charge additional fees to set up and maintain them.

Keogh Plans

Keogh plans are another option for the self-employed. There are two kinds: defined-benefit and defined-contribution. The defined-benefit variety states the annual sum you’ll receive upon retirement, which is usually based on salary and tenure, and then you fund your own plan accordingly—hence its appeal for high earners.

The defined-contribution version works like a SEP IRA, but with the added option of locking in a set percentage of your salary as a contribution. Now, there is a lot of paperwork and complexity here, so the aid of a tax adviser is indispensable. 

The contents of this page should not be construed as tax advice. Please contact your tax professional. All contribution limits listed here are as of the tax year 2022.

¹ Technically, this $61K limit applies to all defined contribution plans a person might have, which means you can’t put $61,000 into your SEP IRA while also contributing to (for example) a 401(k).