The Best Retirement Plans For Self-Employed Workers

Americans are quitting their jobs in record numbers in search of better pay and more satisfying work.

Many are opting for self-employment. According to Bureau of Labor Statistics (BLS) data, nearly 9 million Americans described themselves as self-employed in 2022, the highest number in 13 years.

There’s an undeniable appeal to being your own boss, but anyone considering self-employment should understand that it also means figuring out how to save for retirement on your own.

“When you are self-employed, you no longer have the convenience and accountability of having your employer sponsor a retirement plan on your behalf,” said Katie Lorsbach, a certified financial planner (CFP) who works with Country Financial.

Luckily, you’ve got options when it comes to retirement savings. To help you choose, we’ve taken a look at the pros and cons of the best self-employment retirement plans available.

The Best Self-Employed Retirement Plans of 2023

Individual Retirement Accounts (IRAs)

Anyone who earns income can open an IRA, self-employed or not. Individual retirement accounts come in two flavors: the traditional IRA, which offers an up-front tax break; and the Roth IRA, which provides tax-free income in retirement. IRA contributions are not considered a business expense, although they may help reduce your individual tax liability.

• IRA contribution limits: In 2023, individuals may contribute up to $6,500 to an IRA, with an additional $1,000 in catch-up contributions for savers who are 50 or older.
• IRA pros: IRAs are relatively easy to set up, and they offer a very wide range of flexible investment options. Everyone who earns income may contribute to an IRA in addition to the other plans outlined below.
• IRA cons: Compared to other self-employed retirement options, IRAs offer lower contribution limits. Available tax deductions may also be limited if you and your spouse file jointly and are covered by another retirement plan. Roth IRA eligibility is also limited by income. With certain exceptions, withdrawing funds from a traditional IRA prior to reaching age 59 ½ incur a 10% penalty.

Simplified Employee Pension IRA (SEP IRA)

The SEP IRA is a version of a traditional IRA that offers similar tax benefits, plus much higher contribution limits. It’s just as easy to set up as a standard IRA for self-employed people, and offers a similar level of flexibility.

• SEP IRA contribution limits: In 2023, self-employed individuals may contribute up to 25% of their adjusted net earnings, minus one half of the Social Security and Medicare taxes they pay and the plan contributions you make for yourself, up to a maximum of $66,000.
• SEP IRA Pros: SEP IRAs are easy to open and simple to maintain—many of the best IRA providers also offer this type of plan, with great investment options. SEP contributions are tax deductible up to the maximum allowed per year, and can be applied to the prior year’s taxable income, up to the due date and including extensions for the prior year’s tax return. SEP IRAs are also non-exclusive with other IRA accounts, meaning you can still contribute to other IRAs up to the maximum contribution limits.
• SEP IRA Cons: Because SEP IRA contribution limits depend on your annual income, the amount you can save for retirement each year could vary. As with other IRA options, individuals cannot remove money from SEP IRAs prior to 59 ½ without incurring a 10% penalty, with a few exceptions.

Savings Incentive Match Plan for Employees (SIMPLE IRA)

The SIMPLE IRA is designed for self-employed people and small business owners with 100 or fewer employees. The contribution limits are higher than a traditional IRA, but lower than a SEP IRA.

• SIMPLE IRA contribution limits: Self-employed individuals can contribute up to $15,500 in 2023, with an additional catch-up contribution of $3,500 for participants who are 50 or over. Individuals may also contribute either a 2% fixed contribution or 3% matching contribution as an employer-sponsored match to the plan.
• Pros: Contributions to a SIMPLE IRA are tax deductible, and the plans tend to be easy to maintain with relatively few fees. These plans also allow self-employed individuals to contribute both as an employer and an employee, allowing them to save more overall.
• Cons: With only a few exceptions, you cannot contribute to a SIMPLE IRA if you have another retirement plan. Like other IRAs, withdrawing funds prior to retirement age will mean paying a penalty of 10%—and 25% within the first two years of participation in the plan. In addition, you cannot rollover funds from SIMPLE IRA to another plan within the first two years of participation.

Solo 401(k)

The Solo 401(k)—also known as the individual 401(k)—is similar to traditional employer-sponsored 401(k) plans, but you cannot contribute if you have employees, other than your spouse. You make contributions as both an “employer” and as an “employee,” providing you with the ability to save more.

• Solo 401(k) contribution limits: As an employee, self-employed individuals can make salary deferrals up to $22,500 in 2023, as well as an additional $7,500 for those 50 and older. As the employer, individuals can also contribute up to 25% of your net income from self-employment. Total 2023 contributions cannot exceed $66,000, or $73,500 for those 50 or older.
• Pros: Like a SIMPLE plan, self-employed individuals may contribute to a Solo 401(k) both as an employer and employee, allowing them to contribute more overall towards retirement. Individuals can also decide to make either tax-deductible deferrals or post-tax Roth deferrals, based on their needs.
• Cons: These plans can be more complex to maintain, and investment options may be more limited than in IRAs.

What Are Self-Employed Retirement Plans?

Self-employed retirement plans provide people who work for themselves with tax benefits that incentivize them to save and invest to support a comfortable standard of living after they retire.

There are a few additional considerations that self-employed people need to make when thinking through which plan is best. According to Rodney Deloe, CPA, chief operating officer with Straight Talk CPA, self-employed retirement plans give people the opportunity to amass wealth while potentially reducing their current tax liabilities.

How to Choose the Best Self-Employed Retirement Plan for You

Choosing whether a specific self-employed retirement plan is right for you depends on a number of factors. Before you sign up for a plan, ask yourself the following questions:

1. How much do you want to save for retirement each year?

2. How much can you afford to save each year?

3. Do you plan on having employees in your business, other than your spouse? If so, how many?

4. How much time and money do you want to invest in administering your retirement plan?

Once you understand your needs and goals, read over our advice below:

• A Traditional IRA or Roth IRA are best for individuals with relatively low self-employment income.
• SEP IRAs work best for self-employed individuals who don’t plan on having employees in the future and who want to maximize their retirement contributions. “They also work well for people who do not want to invest insignificant time and resources in maintaining a plan,” said Deloe.
• Solo 401(k) plans are the best choice for self-employed individuals without employees. The best-case scenario would also be a person who expects significant self-employment income, wants to maximize their retirement contributions, desires access to funds if needed without penalty, and is willing to incur the additional time and costs to keep up the plan, according to Deloe.
• SIMPLE IRA plans are best for self-employed individuals who expect to employ more than a few additional people.

The Bottom Line

It’s never too late to start making retirement plans, and there’s an account for every type of income.

“The best approach is knowing both the opportunities and risks that come with your retirement plans,” said Lorsbach.

Working with a financial advisor can help you select the investments within your plan that work for your risk tolerance, and a tax advisor can help you determine how much you can contribute and/or deduct each year, as well as any other tax implications that might apply.