Incorporated self-employment jumped 7% in the U.S. during the pandemic and has remained at that level through 2023. Last year, 400,000 more people incorporated their small businesses.
As more Americans swap full-time employment to pursue their passions, it’s crucial to understand retirement savings options so you can comfortably stop working when you’re ready.
Whether you’ve already transitioned to self-employment or are contemplating doing so, here are five self-employed retirement plans to consider.
In This Article
Understanding self-employed retirement plans
Self-employment can mean many things, from launching a small business with employees to working as an independent contractor.
These retirement plans for self-employed individuals ensure you don’t make any freelancing missteps by not preparing for your future. See if you’re eligible and how much you can contribute each year.
Solo 401(k)
A solo 401(k) operates like a regular 401(k) from a traditional job, except that you can make contributions to the account both as an employee and an employer. As the name implies, you can’t have any employees with a solo 401(k), but you can open an extra plan for your spouse.
- Annual contribution limit: $23,000 as an employee and up to 25% of earned income as the employer
- Catch-up contributions: $7,500 (if over 50 years old)
Eligible contributions are tax-deductible, but you’ll pay income tax on future withdrawals. To take penalty-free withdrawals, you must have a triggering event, which includes employment termination or retirement no earlier than age 59 ½.
SEP IRA
Another option for saving for retirement is a SEP IRA. You can use this option even if you still work for another employer and have a retirement plan there. You set up the account as the employer and must contribute the same salary percentage to all employee accounts if you have staff members other than yourself.
- Annual contribution limit: 25% of the employee’s compensation or $69,000
- Catch-up contributions: Not available
Like a solo 401(k), this self-employed retirement plan has tax-deductible contributions, but withdrawals are taxed. There’s a 10% penalty if you take out funds before you turn 59 ½ unless you use the funds for a first-time home purchase or eligible college fees.
SIMPLE IRA
A SIMPLE IRA is an inexpensive plan for small businesses with less than 100 employees. However, employer matching contributions are required, even if employees don’t contribute.
- Annual contribution limit: $16,000 employee contribution; 1% to 3% of salary for employer contribution
- Catch-up contributions: $3,500 (if over 50 years old)
The tax treatment for a SIMPLE IRA is the same as a SEP IRA, which means you could lower your income tax and potentially get a tax refund.
Traditional IRA
A traditional IRA can be used as a freelancer retirement plan even though it’s not specifically designed for self-employed individuals. Contributions up to the limit are tax-deductible if you (and your spouse) don’t have access to a workplace plan.
- Annual contribution limit: $7,000
- Catch-up contributions: $1,000 (if over 50 years old)
If you’re planning for self-employment and don’t need complicated retirement plans with a large annual contribution limit, then a traditional IRA could help you save and lower your tax bill.
Roth IRA
A Roth IRA can also be used as a self-employed retirement plan and offers tax advantages during retirement rather than in the years you make your contributions. The money you contribute isn’t tax-deductible. But the good news is that you don’t pay taxes on eligible withdrawals during retirement.
- Annual contribution limit: $7,000
- Catch-up contributions: $1,000 (if over 50 years old)
The annual contribution limits apply to both traditional and Roth IRAs, so you either need to pick one or split contributions between the two. Also, note that there are income limits to qualify for a Roth IRA. To make the full contribution, the maximum modified adjusted gross income is $153,000 for individuals and $228,000 for those who are married and filing jointly.
Next steps: Retire your way
Wherever you are on your self-employment journey—whether you’re planning your next steps, funding your dream with a business loan, or hiring your first employee—it’s important not to overlook your retirement savings.
Fortunately, several options are available to help you plan for the future while possibly reducing your taxes over the years.
Frequently asked questions about self-employed retirement plans
What retirement plan options are available for self-employed individuals?
Depending on your business and income level, self-employment retirement plans include a solo 401(k), SEP IRA, SIMPLE IRA, traditional IRA, and Roth IRA.
How can I manage my debt while budgeting?
Make the minimum payment on all outstanding balances and choose one to make extra payments on. It could be the smallest balance or the highest interest rate. Then, look for areas in your budget where you can cut back and use those funds to pay down your debt faster.
What contribution limits apply to self-employed retirement plans?
It depends on the plan. Traditional and Roth IRAs have smaller contribution limits, while plans designed specifically for self-employed individuals have higher limits.
Written by Lauren Ward | Edited by Rose Wheeler
Lauren Ward is a personal finance writer who is passionate about helping people simplify their financial decisions. Her work has been featured in outlets such as USA Today Blueprint, CNN Underscored, and many more. She lives in Virginia with her husband and three children.
This information is not intended to be financial or tax advice. Prosper does not provide financial or tax advice. Please consult a financial advisor for financial or tax guidance.