The Five Best Retirement Accounts for Self-Employed

Unlike workers, self-employed business owners and freelancers often need to figure out their retirement plans on their own.

While some of the rules and regulations surrounding IRAs and 401(k)s can appear a bit confusing, finding the right retirement plan for self-employed people is simple.

What’s more, it’s even possible to create a match plan for employees if you own a small business that employs others.

So, let’s look at the five best retirement accounts for self-employed people to see which is right for you.

What is the Best Retirement Plan for Self-Employed Individuals?

Retirement Plan	Contribution Limit	Matching Contributions for Employees	Investment Types	Plan Administrator
Traditional/Roth IRA	$6,500 Annually (+$1,000 catch-up for 50 or older)	No	Stocks, bonds, and mutual funds	Brokerage
Self-Directed IRA	$6,500 Annually (+$1,000 catch-up for 50 older)	No	Alternative Assets (ex. Real estate, gold, loans)	Custodian
SEP IRA	20% of net income (see: net profit from IRS Schedule C reduced by the deductible self-employment tax) up to $330,000 annually (2023)	25% of net earnings up to $66,000 annually (2023)	Stocks, bonds, and mutual funds	Brokerage
SIMPLE IRA	$15,500 (2023)	Dollar-for-dollar up to 3% of employee compensation	Stocks, bonds, and mutual funds	Brokerage
Solo 401(k)	$66,000 ($7,500 catch-up rate)	No	Alternative Assets (ex. Real estate, gold, loans)	Brokerage or Plan Trustee

1. Traditional/Roth IRA

Individual retirement accounts are standard retirement accounts, which are great for self-employed people or not offered a retirement plan by their employer. In general, there are two types of individual retirement accounts: Traditional and Roth IRAs.

A Traditional IRA lets you direct pre-tax income toward investments for tax-deferred growth. Capital gains and dividends taxes aren’t assessed until a withdrawal is made.

Roth IRAs allow you to invest post-tax dollars in your account, meaning you won’t get taxed at withdrawal. In essence, this allows you to avoid capital gains in a tax-sheltered account.

Traditional IRA Benefits

• No income limit.
• Allows for some annual tax deductions.
• Tax-deferred growth. No taxes on earnings and contributions until required distributions begin at age 72—73 if you reach age 72 after 12.31.2022. Money earned in a Traditional IRA can also be deductible for the contribution’s tax year.
• Traditional IRAs allow you to invest in nearly all stocks, bonds, mutual funds, and exchange-traded funds (ETFs).
• Unlike 401(k) accounts, IRAs have early withdrawal exceptions that make it possible to take out money to cover expenses for college, adopting a child, buying a first home, and more.

Roth IRA Benefits

• Qualified withdrawals in retirement are entirely tax-free.
• Roth IRAs do not have required minimum distributions (RMDs) during your lifetime.
• Roth IRAs allow you to continue contributing as long as you have earned income, regardless of your age.
• You can withdraw your contributions (but not earnings) at any time without penalties or taxes.
• Roth IRAs can be passed on to your heirs without them having to pay taxes on the distributions, provided certain conditions are met. See more information here.

Primary Differences

• Traditional IRAs allow investment with pre-tax dollars, and Roth IRAs with post-tax dollars.
• Traditional IRAs don’t have income limits, but they have age limits.
• Roth IRAs are not tax deductible, but you won’t ever pay taxes on any withdrawals of contributions.

Both retirement accounts are excellent for self-employed individuals. However, they do come with limited investment options, which makes our next pick that much more appealing.

2. Self-Directed IRA

A self-directed individual retirement account (SDIRA) is an IRA that allows you to invest in alternative assets prohibited by other IRAs. As the name implies, a self-directed IRA gives you full control over your investment decisions.

SDIRAs can be structured like a Roth or Traditional IRA, depending on your anticipated tax bracket at retirement.

Like the traditional IRA, the SDIRA allows you to save for retirement on a tax-advantaged basis.

However, SDIRAs offer greater flexibility regarding investments beyond stocks, bonds, mutual funds, and other common investments. For example, SDIRAs permit investments in:

• Limited liability companies (LLCs).
• Cryptocurrency and crypto staking.
• Limited partnerships (LPs).
• Private hedge funds.
• C corporations.
• Real estate investment trusts (REITs).
• Small businesses.
• Startup companies.

SDIRAs are advantageous because they allow for high returns and greater diversification.

Of course, investing in alternative assets also comes with a bit of risk. SDIRAs also come with higher fees and are administered by a custodian, which differs from your traditional brokerage account.

Almost anyone can open an SDIRA, and rollovers from any tax-advantage account can be completed tax-free.

Be sure to research self-directed IRA investment rules before investing.

Read More: How Do Self-Directed IRAs Work?

3. SEP IRA

Designed for both self-employed workers and small-business owners, Simplified Employee Pension plans (SEP IRA) allow you to set aside income for retirement without the enrollment and operating fees of conventional retirement plans. This is a common option when setting up a simple match plan for employees.

The SEP-IRA rule allows account holders to invest up to 25% of an employee’s compensation (up to $66,000 in 2023), making this a great choice for high-earning individuals. Here’s a rundown on how SEP IRAs work:

• Eligible participants are employees over age 21 who have worked for an employer for at least three of the past five years.
• Eligible employees must have earned at least $650 during 2021 and 2022.
• Employers must match all self-directed distributions for enrolled employees. For instance, an employer who stashes away 10% of their own compensation must contribute 10% to each employee’s compensation.

A SEP IRA can be combined with traditional and Roth IRAs, and all contributions are deductible.

There is no commitment to contribute every year after opening a SEP IRA. Additionally, no catch-up contribution option exists for people aged 50 and over with the SEP.

4. SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a tax-deferred employer-sponsored retirement plan designed for small businesses with less than 100 employees.

A SIMPLE IRA allows an employer to make either non-elective contributions of 2% of each employee’s salary or dollar-for-dollar matching contributions of each employee’s contributions (up to 3% of salary).

While the maximum annual employee contribution for the SIMPLE IRA is $15,500 (2023), employees reaching age 50 and over can make additional catch-up contributions of $3,500.

5. Solo 401 (k)

Finally, the Solo 401(k) offers many of the same features as employer-sponsored retirement plans but with the added benefit of increased contribution ranges.

To contribute to a solo 401 (k), you must be a business owner with no employees. While the maximum contribution on the solo 401 (k) is $61,000 (2022), there’s a $6,500 catch-up contribution option if you’re age 50 or older.

A solo 401 (k) can be opened as either a Traditional or Roth account. With a Traditional solo 401 (k), contributions are made on a pre-tax basis to reduce your tax burden. Roth 401(k) contributions are made with after-tax dollars.

Some solo 401(K)s do allow for a wider range of investments, but this depends on your brokerage and whether you set yourself up as the plan trustee.

Read More: SEP IRA vs. Solo 401(k).

IRA Contribution Limits

IRA contribution limits are routinely adjusted for inflation. Typically, limits are determined using either a capped figure or salary percentage. Here’s a rundown of current IRA contribution limits for self-employed IRA options (2023):

• Traditional IRA: $6,500 ($7,500 over age 50).
• SDIRA: $6,500 ($7,500 over age 50).
• SEP IRA: 25% of compensation/$66,000. Self-employed individuals max out at $330,000 of their net income.
• SIMPLE IRA: $14,000.
• Solo 401(k): $66,000 (+$7,500 catch-up rate for people over age 50).

When considering any type of IRA, it’s important to factor in income bracket, expanded contribution allotments for age, and other stipulations that could allow you to invest the maximum amount possible while receiving a tax advantage on your employment income.

Which Self-Employed Retirement Plan Is Right for Me?

The Traditional or Roth IRA is a great starting point for someone who simply wants to start putting money in a retirement account when they don’t have any kind of savings incentive match plan from an employer.

However, self-employed people with high-income levels or employees should consider an SDIRA, SEP IRA, Simple IRA, or Solo 401 (k) to discover which features allow them to save for retirement while enjoying the biggest tax deduction.

Self-employed people catching up with retirement savings should also consider plans that increase maximum contributions after age 50.

Finally, everyone who earns income should open a retirement account. For self-employed people, a retirement plan can allow you to take a tax deduction on your tax return, reducing your taxable income.

For small-business owners, matching contributions can help elevate their status as desirable employers while providing them with a tax advantage.

FAQs: Self-Employed Retirement Plans

Can I contribute to both a Roth IRA and a retirement plan for my self-employed business?

Yes, you can contribute to a Roth IRA alongside your self-employed retirement plan. However, income limits for Roth IRA contributions may apply.

What are the benefits of a Solo 401(k) over other retirement plans?

A Solo 401(k) offers higher contribution limits, catch-up contributions for those aged 50 and above, and the option to make both employee and employer contributions.

Are there any tax benefits to contributing to a retirement plan as a self-employed individual?

Yes, contributions to certain retirement plans are often tax-deductible, which can reduce your taxable income for the year.

What happens if my business experiences fluctuations in income? Can I adjust my contributions accordingly?

Yes, many self-employed retirement plans allow you to adjust your contributions based on your business’s income for the year.