6 Self-Employed Retirement Plan Options (Your Best Options)

Self-employment offers incredible freedom and flexibility, but it also means you're solely responsible for planning your retirement. Unlike traditional employees who might have access to employer-sponsored retirement plans, self-employed individuals need to take proactive steps to secure their financial future.

If you're aiming to achieve financial independence sooner, check out our guide on how to retire early.

According to a comprehensive study by Transamerica Institute, 28% of self-employed people have no intention of retiring. However, retirement savings remain a high priority for many:

• 56% identify building savings as a top financial goal.
• 50% focus specifically on saving for retirement.

The data also reveals interesting patterns in how self-employed individuals approach retirement planning:

• 71% of self-employed individuals actively save for retirement, slightly lower than the 75% among traditionally employed workers.
• Self-employed people tend to start saving at age 30, compared to age 27 for those with traditional employment.

The self-employed landscape is notably diverse. According to the Transamerica study, the median self-employed individual has been in business for 12 years, with 69% working full-time and 31% part-time. Most are well-educated, with 43% holding college degrees and another 29% having attended some college or trade school. The median household income stands at $72,000, with 39% earning $100,000 or more annually.

This financial profile suggests many self-employed individuals have the capacity to save significantly for retirement, though their irregular income patterns may require more flexible retirement planning strategies.

The commitment to retirement savings varies among self-employed individuals:

• 55% report saving consistently.
• 30% save occasionally.
• 15% never save for retirement.
• Those who do save put away a median of 15% of their annual income toward retirement.

In this article, we'll explore six of the best retirement plans for self-employed individuals, helping you understand your options and make informed decisions about your future.

What's a Self-Employed Retirement Plan and How Is It Different?

A self-employed retirement plan is a savings account specifically designed for individuals who work for themselves, such as freelancers, consultants, and small business owners. These plans allow you to set aside funds for your future while offering tax advantages that can help reduce your taxable income today.

Unlike traditional retirement plans offered by employers, self-employed retirement plans require you to take the initiative in setting up, funding, and managing the account. This means you have greater control over your investments but also bear the responsibility of ensuring you're saving enough for retirement.

1. Traditional and Roth IRAs

Individual Retirement Accounts (IRAs) are foundational tools for retirement savings, especially for self-employed individuals. They are tax-advantaged savings plans that you fund and manage independently, providing flexibility and control over your retirement investments.

Traditional IRA

A Traditional IRA allows you to make pre-tax contributions, which can reduce your taxable income for the year. The funds in the account grow tax-deferred, meaning you won't pay taxes on the earnings until you withdraw them during retirement. This is beneficial if you expect to be in a lower tax bracket when you retire.

Roth IRA

A Roth IRA works differently. You make contributions with after-tax dollars, but the earnings grow tax-free, and qualified withdrawals during retirement are also tax-free. This is ideal if you anticipate being in a higher tax bracket in the future.

Contributions

For 2024, the contribution limits for IRAs are:

• $7,000 for individuals under 50.
• An additional $1,000 catch-up contribution for those aged 50 or older.
• These limits apply across all your IRAs combined.
• Note: There are income limits for contributing to a Roth IRA.

Taxation

• Traditional IRA: You get an upfront tax deduction on contributions, but withdrawals during retirement are taxed as ordinary income.
• Roth IRA: No tax deduction on contributions, but withdrawals are tax-free.
• Early Withdrawals: Generally, withdrawals before age 59½ incur a 10% penalty and are subject to income tax. However, Roth IRA contributions (not earnings) can be withdrawn penalty-free at any time.

Getting Started

You can open an IRA at many banks, credit unions, or financial institutions. The process is straightforward:

• Choose a financial institution that suits your investment preferences.
• Complete the application process.
• Make your initial contribution and set up automatic contributions if possible.

2. SEP IRA

For self-employed individuals seeking higher contribution limits, a SEP IRA for self employed professionals stands out as an excellent option. It combines elements of a Traditional IRA and a 401(k), allowing for higher contribution limits and flexibility in funding. This type of retirement account is particularly popular among successful freelancers and small business owners who want to maximize their retirement savings.

What Is a SEP IRA?

• Contributions are made with pre-tax dollars, reducing your taxable income.
• Funds grow tax-deferred until you withdraw them during retirement.
• Ideal for self-employed individuals with variable income, as you can adjust contributions based on your earnings.

Contribution Rules

For 2024, SEP IRA contribution limits are:

• Up to 25% of your net earnings from self-employment.
• Maximum contribution of $69,000.
• Contributions are discretionary—you can decide how much to contribute each year.
• If you have employees, you must contribute the same percentage of compensation for each eligible employee.

Tax Implications

• Contributions are tax-deductible, lowering your taxable income.
• Investments grow tax-deferred.
• Withdrawals are taxed as ordinary income.
• Early withdrawals before age 59½ may incur a 10% penalty plus income tax.

How to Set Up a SEP IRA

• Consult a financial advisor or accountant to ensure a SEP IRA is right for you.
• Complete IRS Form 5305-SEP.
• Choose a financial institution to hold your SEP IRA.
• Open accounts for yourself (and any eligible employees).
• Begin making contributions, keeping in mind that contributions must be made by your tax filing deadline.

3. SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is designed for small businesses with 100 or fewer employees, including self-employed individuals. It's a straightforward retirement plan that requires both employer and employee contributions, making it a shared effort in building retirement savings.

Key Features of a SIMPLE IRA

• Mandatory employer contributions, either matching or non-elective.
• Employee contributions are made pre-tax, reducing taxable income.
• Easy to set up and maintain, with less administrative burden than a 401(k).

Contributions

For 2024, the contribution limits for a SIMPLE IRA are:

Employee contribution limit of $16,000.

• Additional catch-up contribution of $3,500 for those aged 50 or older.

Employer Contribution Options:

• Match employee contributions dollar-for-dollar up to 3% of the employee's compensation.
• Non-elective contribution of 2% of each eligible employee's compensation, regardless of whether the employee contributes.

Taxation

• Employer contributions are tax-deductible as a business expense.
• Employee contributions reduce taxable income.
• Investments grow tax-deferred.
• Withdrawals during retirement are taxed as ordinary income.
• Early withdrawals may face a 10% penalty (25% if within the first two years of participation).

How to Set Up a SIMPLE IRA

• Choose a financial institution that offers SIMPLE IRA plans.
• Complete the necessary plan documents, such as IRS Form 5304-SIMPLE or 5305-SIMPLE.
• Notify eligible employees about the plan and their rights.
• Set up accounts for yourself and any employees.
• Begin contributions, adhering to the annual deadlines.

4. Defined Benefit Plan

A Defined Benefit Plan, often considered a traditional pension plan, promises a specified monthly benefit at retirement. This plan is particularly beneficial for high-income self-employed individuals who wish to contribute substantial amounts toward their retirement.

What Is a Defined Benefit Plan?

• Provides a guaranteed retirement income, based on factors like salary history and duration of employment.
• Contributions are calculated actuarially, meaning they are based on your age, expected return on investments, and desired retirement benefits.
• Ideal for those who can commit to contributing large amounts annually.

Contributions

For 2024, the key points are:

• Maximum annual benefit of $275,000 or 100% of your average compensation for your highest three consecutive years.
• Contributions are determined by an actuary and can be significantly higher than other retirement plans.
• Requires annual contributions, making it less flexible than other options.

Taxation

• Contributions are tax-deductible, reducing your taxable income.
• Investments grow tax-deferred.
• Retirement distributions are taxed as ordinary income.
• Complexity: Requires ongoing actuarial calculations and plan administration.

Getting Started

• Consult with a financial advisor and an actuary to determine if this plan suits your needs.
• Choose a plan provider experienced with Defined Benefit Plans.
• Complete the necessary documentation and comply with IRS regulations.
• Commit to funding the plan annually, as required by law.

5. Solo 401(k)

A Solo 401(k), also known as an Individual 401(k), is designed for self-employed individuals with no employees other than a spouse. Understanding solo 401(k) contribution limits is crucial, as this plan allows you to contribute as both an employee and an employer, potentially maximizing your retirement savings.

Key Features of a Solo 401(k)

• Higher contribution limits due to dual roles.
• Option for both Traditional and Roth contributions, offering tax flexibility.
• Ability to take loans from your 401(k) balance (subject to certain conditions).

Contribution Limits

For 2024, the contribution limits are:

Employee Contribution:

• Up to $22,500.
• Additional $7,500 catch-up contribution if you're aged 50 or older.

Employer Contribution:

• Up to 25% of your net self-employment income.

Total Maximum Contribution:

• $69,000 for those under 50.
• $76,500 for those aged 50 or older.

Tax Rules

• Traditional Solo 401(k): Contributions are pre-tax, reducing taxable income, and withdrawals during retirement are taxed.
• Roth Solo 401(k): Contributions are made after-tax, but withdrawals during retirement are tax-free.
• Early withdrawals may incur penalties and taxes.
• Loan Option: You may be able to borrow up to 50% of your account balance, not exceeding $50,000.

How to Set Up a Solo 401(k)

• Choose a financial institution that offers Solo 401(k) plans.
• Complete the plan adoption agreement and account application.
• Obtain an Employer Identification Number (EIN) from the IRS.
• Decide between Traditional, Roth, or both types of contributions.
• Begin making contributions, ensuring you adhere to annual limits and deadlines.

6. Health Savings Account (HSA)

While not a traditional retirement plan, a Health Savings Account (HSA) can play a valuable role in your retirement strategy. An HSA offers triple tax advantages and can be used to cover healthcare expenses now or in retirement.

What Is an HSA?

• Available to individuals with high-deductible health plans (HDHPs).
• Contributions are tax-deductible, even if you don't itemize deductions.
• Funds grow tax-free, and withdrawals for qualified medical expenses are tax-free.
• Unused funds roll over year after year, and after age 65, you can use the money for any purpose (taxed as income if not for medical expenses).

Contributions

For 2024, the contribution limits are:

• $4,150 for individual coverage.
• $8,300 for family coverage.
• Additional $1,000 catch-up contribution if you're 55 or older.

Tax Rules

• Contributions reduce your taxable income.
• Earnings grow tax-free.
• Withdrawals for qualified medical expenses are tax-free.
• After age 65, non-medical withdrawals are taxed as ordinary income but incur no penalties.

Getting Started

• Ensure you're enrolled in a high-deductible health plan.
• Choose an HSA provider—banks, credit unions, and financial institutions often offer HSAs.
• Open your account and start making contributions.
• Use HSA funds to pay for qualified medical expenses, saving receipts for tax purposes.

How to Start Saving for Self-Employed Retirement

Emergency Fund First

Before diving into retirement savings, establish an emergency fund. This safety net ensures you can handle unexpected expenses without derailing your long-term savings goals.

• Aim to save 3-6 months' worth of expenses.
• Keep it in a high-yield savings account for easy access and better interest rates.
• Separate your emergency fund from your business accounts to avoid accidental spending.

Need help understanding emergency funds? Check out our guide on emergency fund vs. rainy day fund.

Set Your Savings Goals

Creating clear and achievable savings goals helps you stay focused:

• Determine how much you need to retire comfortably.
• Use a retirement calculator to estimate your required nest egg.
• Aim to contribute 15-20% of your pre-tax income if you're starting in your 30s.
• Increase to 25-30% if you're starting in your 40s.
• Adjust your goals based on your income fluctuations and business performance.

Set Up Contributions Automatically

Automating your savings can make a significant difference:

• Set up automatic transfers from your checking account to your retirement accounts.
• Schedule contributions to coincide with your income, such as after receiving client payments.
• Review and adjust your contributions periodically to stay aligned with your goals.

Plan for Retirement with Kubera

Planning for retirement involves more than just saving money; it requires a comprehensive view of your financial situation. Kubera offers an all-in-one financial dashboard that helps you organize, track, and manage your assets effectively.

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How Kubera Can Help

• Integrate all your accounts: Link your 401(k)s, IRAs, bank accounts, investment portfolios, and even cryptocurrency holdings.
• Monitor your net worth: Get real-time updates on your financial standing.
• Plan and rebalance your portfolio: Ensure your investments align with your retirement goals.
• Simulate future scenarios: Adjust for income, expenses, taxes, and inflation to project your future net worth.

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Conclusion

Securing your financial future as a self-employed individual requires careful planning and proactive action. By understanding the various retirement plan options available—such as SEP IRAs, SIMPLE IRAs, Solo 401(k)s, and others—you can choose the plan that best fits your needs and goals.

Remember, the earlier you start saving for retirement, the more time your money has to grow. Take advantage of tax-advantaged accounts, set clear savings goals, and consider using tools like Kubera to keep your financial journey on track.