The Best Retirement Plans for Self-Employed Individuals

Retirement Plan Options | by Jules Buxbaum | Saturday, January 04, 2025

Are you a freelancer or small business owner looking for the best retirement plans for self-employed individuals? Contrary to popular belief, building a strong nest egg without a traditional 9–5 job is absolutely possible, especially if you understand the tax benefits, contribution limits, and unique options at your disposal.

One way to get started is to explore various strategies outlined in our guide on how to start saving for retirement at every age. Even if you’re just starting out, tapping into the right retirement plan can significantly increase your financial security over time.

Why Retirement Planning Matters for the Self-Employed

Unlike traditional employees who often have automatic 401(k) deductions and matching contributions, self-employed individuals have to shoulder the entire burden themselves. This requires disciplined saving and selecting a plan tailored to fluctuating business income.

According to Pew Research, only about 13% of solo self-employed workers participate in retirement plans, compared to over 70% of typical employees. That shortfall can stem from inconsistent income and limited awareness of self-employed retirement plan options.

Yet, having a customized strategy is crucial. There can be valuable tax breaks and potential for higher contributions than you might imagine, especially if you choose a plan like a Solo 401(k). Taking action sooner rather than later can help you capitalize on years of compounding—making a major difference when it’s time to stop working.

Top Self-Employed Retirement Plans

Several retirement account types cater specifically to freelancers, consultants, independent contractors, and sole proprietors. While each plan has unique benefits, many self-employed individuals mix and match multiple accounts to achieve tax diversity and flexibility.

1. Solo 401(k)

The Solo 401(k), sometimes called an individual 401(k), is designed for those who have no full-time employees other than a spouse. With this plan, you can contribute as both “employee” and “employer.” This offers an opportunity for higher total contributions than a similar income level would permit with other plan types.

For 2024, you can contribute up to $69,000 if you’re under 50, and $76,500 if you’re 50 or older. Contributions can be made pre-tax or through a Roth component, giving you options for how your savings will be taxed down the road. Some Solo 401(k)s even allow loans against your balance, which is often not permitted in other self-employed retirement arrangements.

2. SEP IRA

A SEP IRA (Simplified Employee Pension) is admired for its straightforward setup. You could potentially enjoy tax-deductible contributions of up to 25% of your net business earnings, capped at $69,000 (for 2024). You can also skip or reduce contributions in leaner years, making it more flexible if your income varies widely.

However, the SEP IRA only allows employer contributions—there is no distinct employee contribution. If you plan to have future staff, you’ll be required to contribute the same percentage of pay for eligible employees.

3. SIMPLE IRA

SIMPLE stands for Savings Incentive Match Plan for Employees. It’s usually chosen by smaller companies with up to 100 employees, but it can also be a fit for some sole proprietors expecting to hire down the line.

The 2024 employee contribution limit is $16,000 (with an extra $3,500 for those 50+). Employers must either match employee contributions up to 3% of compensation or provide a 2% non-elective contribution. While not as high as Solo 401(k) or SEP IRA limits, the SIMPLE IRA offers lower administrative costs and is simpler to manage than a standard 401(k).

4. Traditional and Roth IRAs

If you have earned income, you can likely open an IRA. Traditional IRAs offer potential tax deductions now, while Roth IRAs provide tax-free qualified withdrawals later. Each has a $7,000 annual contribution limit in 2024, with an extra $1,000 for those 50 and older.

Roth IRAs are particularly popular among sole proprietors who anticipate higher tax brackets when they retire. If you exceed the Roth IRA income limits, consider a “backdoor” Roth strategy (where allowed by law) to gain access to that tax-free growth.

5. Defined Benefit Plans

Though less common, defined benefit plans can let high-income self-employed professionals contribute well over $70,000 per year—sometimes well into six figures. These plans calculate required contributions based on factors like your age, income, and desired annual payout in retirement. They can be more complicated and expensive to administer, but they offer an accelerated path to large tax-deferred savings if your business income is substantial and stable.

Because of the complexity, many self-employed individuals who choose a defined benefit plan also open a simpler plan, such as a SEP IRA or Solo 401(k), for added flexibility.

Contribution Limits, Tax Perks, and Other Considerations

Self-employed individuals often overlook how robust their tax advantages can be. Every contribution you make to a traditional plan (Solo 401(k), SEP IRA, or Traditional IRA) lowers your current taxable income, potentially saving thousands of dollars each year.

For instance, a consultant earning $120,000 might save enough in taxes to reinvest and accelerate overall wealth building just by maxing out a Solo 401(k). Over time, these decisions can add up to a significant sum in retirement, especially when invested in growth-oriented vehicles like index funds or exchange-traded funds.

If fluctuating cash flow is a concern, the SEP IRA and SIMPLE IRA can be appealing. You can scale contributions up or down as your business profits change—particularly with a SEP IRA, where skipping a year doesn’t incur a penalty. The key is to stay consistent and set realistic goals based on your annual earnings outlook.

Overlooked Factors: Risk Exposure & Future Earnings

Many traditional advisors suggest holding increasingly less stock as you age. Yet the real driver of risk tolerance should be how much future earning capacity you have compared to your current wealth. This perspective aligns with research done by economists at 2Pi Financial, who argue that simply reducing equity exposure by default may not be ideal.

In their view, if your future income potential is large relative to your savings, you can afford more stock-heavy allocations—even later in life. This differs from the approach taken by common target-date funds, which generally shift heavily into fixed income with age. As 2Pi sees it, relying on age-based shifts alone might leave you underexposed to equity growth, especially if you still have strong income prospects or can handle market dips.

Where 2Pi Financial’s Planning Engine Fits

If you want to model different scenarios—like changing your retirement age, tweaking your savings rate, or adjusting risk tolerance—the Two Pi Financial Planner can guide you. This platform shows how adjusting variables can boost the probability of your portfolio lasting through retirement, revealing the trade-offs in real time.

The tool’s calculations highlight 2Pi Financial’s core philosophy: there’s no ironclad rule that says you must decrease stock exposure just because you hit a certain birthday. Instead, risk should be balanced against factors like net worth, earnings power, and market performance outlook.

Common Roadblocks and Helpful Resources

Building a successful retirement strategy requires you to sidestep a few frequent hiccups. For instance, many people contribute too little, too late, and end up scrambling for ways to make up lost ground. If you want tips on avoiding pitfalls, check out our overview of common mistakes to avoid when planning for retirement.

Meanwhile, it’s normal to have concerns about inflation, taxes, or how market downturns could derail your plan. Remember that self-employed retirement accounts typically allow you to diversify, whether you prefer equities, bonds, or alternative investments. For added guidance, see our breakdown of understanding inflation risk in retirement savings to learn how to protect your long-term gains.

Key Takeaway

Identifying which plan best suits you—Solo 401(k), SEP IRA, SIMPLE IRA, Traditional/Roth IRA, or even a defined benefit plan—often depends on your earnings profile and future ambitions. Think about your risk appetite too: a balanced but growth-oriented portfolio could significantly boost your retirement security, especially if you have steady earnings potential.

If you do find yourself running behind schedule, read about what to do if you’re behind on retirement savings for ideas on how to accelerate your contributions effectively. By leveraging flexible options and aligning your risk level with realistic goals, you can secure a rewarding retirement no matter what your self-employed journey looks like.

References

• IRS. (2024). “Retirement Plans for Self-Employed People.” Available at: https://www.irs.gov/retirement-plans
• Pew Trusts. (2019). “America’s Self-Employed Workers Are Ill-Prepared for Retirement.” Available at: https://www.pewtrusts.org
• Kiplinger. (2023). “SEP IRA Limits.” Available at: https://www.kiplinger.com/retirement
• Fidelity. (2023). “Retirement for the Self-Employed.” Available at: https://www.fidelity.com/learning-center