When you work for a company, saving for retirement often can be straightforward. Provided you can participate in a plan, you may be able to put a percentage of your paycheck into your retirement account automatically. Your employer might even match your contribution.
But when you're your own boss, saving for retirement can be more complicated. Fortunately, there are several retirement plan options for self-employed people. Here are four strategies to consider when deciding how to set up a self-employed retirement plan.
1. SEP IRAs
A Simplified Employee Pension (SEP) individual retirement account (IRAs) allows employers to contribute the lesser of $72,000 or 25% of each employee’s salary (or their own pay, if they’re a small business owner) to a dedicated retirement account.1
Anyone who earns self-employment income can open a SEP IRA - whether they’re:
- A solo entrepreneur
- A small business owner with a few employees
- A freelancer working side jobs
Why SEP IRAs Appeal to Small Businesses
Compared with traditional employer-based retirement plans, SEP IRAs are easier to set up and come with lower administrative costs. They also offer flexibility. Business owners can adjust contributions each year based on their cash flow. However, while employees own their SEP IRAs, only employers can make contributions - employees cannot contribute to these accounts themselves.
Higher Contribution Potential
For freelancers and small business owners, the biggest advantage of a SEP IRA is the higher contribution limit.
Traditional and Roth IRAs:
- $7,500 per year if under age 50
- $8,600 per year if age 50 or older2
SEP IRAs: Allow significantly larger contributions each year, helping self-employed individuals grow their retirement savings faster. Another advantage of a SEP IRA is that contributions are tax-deductible, which can reduce your current tax bill and increase your retirement savings.
However, there are a few rules to keep in mind:
- Early withdrawals (before age 59½) trigger a 10% additional tax.3
- Excess contributions may result in a 6% penalty unless the extra amount is withdrawn before the tax filing deadline for that year.4
2. SIMPLE IRAs
Any small business owner with 100 or fewer employees can open a Savings Incentive Match Plan for Employees (SIMPLE) IRA for themselves and their employees.5 While it’s similar to a SEP IRA, the two plans differ in several key ways.
Employer Contributions
With a SIMPLE IRA, employers are required to contribute each year. You can choose one of two options:
- Matching contribution: Up to 3% of each employee’s salary.
- Non-elective contribution: 2% of each employee’s eligible annual compensation, regardless of whether that employee contributes to the plan.
Unlike a SEP IRA, employees are also allowed to contribute directly to their own SIMPLE IRAs.
Contributions & Catch-Up Options
Tax Deductions
If you’re a small business owner, you can deduct any contributions you make to your employees’ SIMPLE IRAs on your business tax return.6
If you’re a sole proprietor or partner, you can also deduct contributions to your own SIMPLE IRA, along with any matching or non-elective contributions you’ve made for employees, on your personal tax return.
Limitations and Early Withdrawals
There are some restrictions to consider:
- Employers generally can’t have another retirement plan in place.
- Withdrawals before age 59½ typically trigger a 10% penalty and income taxes, unless you qualify for an exception such as:
- Disability
- Qualified education expenses
- Unreimbursed medical expenses exceeding 10% of adjusted gross income
If you withdraw funds within two years of first participating in a SIMPLE IRA, the penalty increases to 25%.7
Like a SEP IRA, the main benefit of a SIMPLE IRA is that it allows you to save for retirement as a freelancer or small business owner while still getting a tax deduction. This may free up money that you could reinvest in the business or put toward your retirement savings if you haven't already exceeded your contribution limit for the year.
3. Solo 401(k)s
A solo 401(k) is designed for freelancers and small business owners who have no employees. It covers you as the business owner and your spouse if they earn income from the business.8
Contribution Options
| Role | Type of Contribution | Contribution Limit | Taxes |
|---|---|---|---|
| Employee | Elective deferrals (up to 100% of earned income) | Up to $24,500 if under 50 Up to $32,500 if 50 or older2 |
Can be made before or after paying income tax |
| Employer | Nonelective contributions |
Up to 25% of compensation |
Can be made before or after paying income tax |
| Combined Total |
- | Cannot exceed $69,000 | Can be made before or after paying income tax |
Note: Withdrawals made early may be subject to a 10% penalty.9
Calculating Earned Income
As a self-employed person, you'll likely need to do some math to determine your earned income, which is defined as your net earnings after deducting half your self-employment tax and any contributions you make for yourself.8
Once you've figured out this number, you can use it to determine your annual contribution and deduction limits. If you're self-employed, your income will probably vary every year, so it's crucial to recalculate these numbers annually or work with a tax professional.
4. Solo Roth 401(k)
A solo Roth 401(k) is a separate account within a regular solo 401(k) plan. It’s created when you make after-tax contributions to your solo 401(k).10
Contribution Options
You can contribute in one of two ways:
- After-tax (Roth) contributions
- Pre-tax (traditional) contributions
With pre-tax contributions, you defer federal and state income taxes until you withdraw the money after age 59½. With Roth contributions, you pay taxes upfront, allowing your account to grow tax-free. Qualified withdrawals made on or after age 59½ are also tax-free. Please note: Contributions to a solo Roth 401(k) are not tax-deductible.
Advantages of a Solo Roth 401(k)
As mentioned, you can make either after-tax contributions or tax-deferred pre-tax contributions to a solo 401(k), which means you'll pay federal and state income taxes on the money when you withdraw it after age 59½. One of the main advantages of making solo Roth 401(k) contributions is that you can enjoy tax-free growth on these contributions and not have to worry about paying taxes on it in retirement (as long as you make qualified distributions on or after age 59½). However, a drawback is that contributions to a solo Roth 410(k) aren't tax-deductible.
Another benefit is that there is no income limit to participate. A typical Roth IRA, on the other hand, bars many high-income earners from contributing, such as single filers with a modified adjusted gross income of more than $168,000 a year or joint filers with a modified adjusted gross income of more than $252,000 a year.11
Roth 401(k) Contribution Limits
Choosing How to Contribute
You can decide whether to make pre-tax solo 401(k) contributions, after-tax Roth 401(k) contributions or both. It's important to know you can only make employee Roth contributions in a solo 401(k). As an employer, you can match designated Roth contributions (for example, if you employ your spouse), but it will be on a pre-tax basis and subject to taxes later.11
A Look Down the Road
Freelancers now make up 36% of the U.S. workforce.12 This means millions of Americans will have to weigh retirement plan options for self-employed individuals and navigate how to set up a self-employed retirement plan.
Even if you run a successful business, that organization (and its liabilities) likely won't be your only retirement asset. A SEP IRA, SIMPLE IRA, solo 401(k) or solo Roth 401(k) could help you better prepare for your financial future - and potentially ensure the years of hard work you put into your business pay off with a comfortable retirement. A financial professional can help you consider your options.
Build a strong retirement by choosing the right plan for your needs. Start Your Free Plan
Sources
- The 2026 Retirement Plan Contribution Limits. https://www.whitecoatinvestor.com/retirement-plan-contribution-limits/.
- 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500. https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-increases-to-7500.
- Retirement plans FAQs regarding IRAs. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-iras.
- SEP plan Fix-it Guide - Contributions to the SEP-IRA exceeded the maximum legal limits. https://www.irs.gov/retirement-plans/sep-plan-fix-it-guide-contributions-to-the-sep-ira-exceeded-the-maximum-legal-limits.
- SIMPLE IRA plan. https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan.
- SIMPLE IRA plan FAQs: Depositing and deducting contributions. https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-simple-ira-plans#depositing.
- SIMPLE IRA withdrawal and transfer rules. https://www.irs.gov/retirement-plans/simple-ira-withdrawal-and-transfer-rules.
- One-participant 401(k) plans. https://www.irs.gov/retirement-plans/one-participant-401k-plans.
- 401(k) resource guide - plan participants - general distribution rules. https://www.irs.gov/retirement-plans/plan-participant-employee/401k-resource-guide-plan-participants-general-distribution-rules.
- Roth comparison chart. https://www.irs.gov/retirement-plans/roth-comparison-chart.
- Retirement plans FAQs on designated Roth accounts. https://www.irs.gov/retirement-plans/retirement-plans-faqs-on-designated-roth-accounts.
- Upwork Study Finds 1 in 4 U.S. Skilled Knowledge Workers Now Work Independently, Generating $1.5 Trillion in Earnings. https://www.globenewswire.com/news-release/2025/04/23/3066181/0/en/Upwork-Study-Finds-1-in-4-U-S-Skilled-Knowledge-Workers-Now-Work-Independently-Generating-1-5-Trillion-in-Earnings.html/.
