Your options for a steady retirement income
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Retirement plan options: Self-employed people can choose from a SEP IRA, Solo 401(k), SIMPLE IRA, defined benefit plans, or Roth and traditional IRAs.
Best retirement plan for the self-employed: This depends on the level of income, number of employees, and administrative skills.
Complementing option: Self-employed people can also opt to use CDs to grow their retirement savings.
Having a small business or being self-employed can give you a lot of options and a certain measure of freedom. This also applies to saving for retirement, as there are many different ways to make sure you can maintain your current lifestyle when you retire.
A self-employed retirement plan or account can act as a cushion and help reduce income taxes during your high-earning years. Before deciding how to save for long-term goals, it’s important to know your options.
The SEP IRA, or Simplified Employee Pension, is an account that allows you to defer taxes on contributions and also on any investment growth in the account. That means you can grow your funds without current taxation and potentially accumulate a larger nest egg than with an ordinary, taxable brokerage account (although actual growth depends on your investment choices and returns). This kind of self-employed retirement plan is flexible, which means that you don’t have to contribute every year.
Although SEP IRAs can be used by businesses of any size, they might be best suited to self-employed people, small-business owners, or members of a partnership. So you can use one whether you have employees or not. If you do have employees, the contributions you make for them must be equal as a percentage of pay to the ones you make for yourself. That means you cannot use a SEP IRA for yourself alone, but you have to make contributions for all your employees. Having more than a few employees can make this self-employed retirement option costly, especially if you’d like to put away a large amount for your own retirement.
As SEP IRAs are funded only by the employer, employees can’t contribute on their own behalf. For the 2025 tax year, contribution limits can be up to 25% of each eligible employee’s compensation, with a maximum limit of $70,000 — or whichever is less, with the maximum compensation that can be considered for contribution of $350,000.¹
The big advantages of SEP IRAs are their low cost and simplicity, as they require fewer administrative responsibilities, and typically don’t have start-up costs or annual fees.
Let’s look at the key takeaways:
Best suited for | Self-employed individuals, small business owners with no or few employees |
Contribution limit | In 2024: maximum of $69,000 with a maximum compensation that can be considered of $345,000 In 2025: maximum of $70,000 with a maximum compensation that can be considered of $350,000 |
Tax advantage | For traditional SEP IRA contributions, a deduction of a maximum of $70,000 or 25% of net self-employment income (limited to $350,000 cap) on the tax return |
Employee element | Contribution of an equal percentage of salary for each employee |
A self-employed 401(k) is a useful retirement plan for sole proprietors, independent consultants, partnerships, and small business owners with no employees (apart from a spouse). It’s similar to a traditional 401(k) you might be offered at a larger company, but it’s designed specifically for businesses without full-time employees.
With a self-employed 401(k), you can contribute both as an employee and as the employer. That means you can make contributions as the employee from your pre-tax income, and also make contributions as the employer.
As an employee, you can contribute elective deferrals of up to $23,500, plus a $7,500 catch-up contribution if you’re over 50. Individuals between ages 60 to 63 are allowed to add an even larger contribution of $11,250.
As the employer, you can add contributions of up to 25% of your compensation. Sole proprietors and single-member LLCs can contribute 25% of net self-employment income. This is calculated as net profit minus half your self-employment tax and the contributions you have made to the plan yourself. For 2025, the maximum compensation that can be considered for contributions is $350,000.
Here are the most important facts:
Best suited for | Business owners or self-employed individuals with no employees (apart from a spouse) |
Contribution limit | In 2025: maximum of $70,000 or 100% of earned income Maximum compensation that can be considered for a contribution of $350,000 |
Tax advantage | Pre-tax contributions with taxed distributions after age 59½ |
Employee element | No contributions when having employees, except a hired spouse |
SIMPLE stands for Savings Incentive Match Plan for Employees and combines both employer and employee contributions for retirement savings. It is a good option for owners of companies with fewer than 100 employees, as it doesn’t require filing annual plan reports with the IRS, and the accounts are owned by the employees.
Employees can put a portion of their income into their retirement account, and based on that, their employer has two options:
1. Match that contribution dollar for dollar, up to a limit of 3% of compensation, or
2. Contribute a fixed percentage for all eligible employees, regardless of whether they contribute.
Employees aren’t tied down to monetary contributions but can choose a variety of investment options for their SIMPLE IRA accounts, such as stocks, savings bonds, exchange-traded funds, mutual funds, and certificates of deposit (CDs).
However, the traditional SIMPLE IRA has some drawbacks, especially if early withdrawals before age 59½ are made. These withdrawals are taxed as income and subject to a 10% penalty. If you make a withdrawal within the first two years of participation in a SIMPLE IRA, the penalty is increased to 25%.
Here are the key facts:
Best suited for | Companies with fewer than 100 employees |
Contribution limit | In 2024: up to $16,000, plus a catch-up contribution of $3,500 if over the age of 50 with a total contribution limit of $23,000 In 2025: up to $16,500, plus a catch-up contribution of $3,500 if over the age of 50 |
Tax advantage | Deductible contributions with taxed distributions in retirement Contributions to employee accounts are deductible as a business expense |
Employee element | Matching contributions by employer Employees can (but don’t have to) contribute through salary deferral |
A defined benefit plan can be another suitable retirement plan for self-employed individuals. It allows you to set up your own pension with a guaranteed stream of income in retirement. As such, it is mainly intended for a self-employed person with no employees and a high income who can contribute a lot to their retirement plan on a permanent basis.
The catch is that a defined benefit plan is expensive with high setup and annual fees. Having employees may raise that fee and oblige you to contribute on their behalf. Additionally, the defined benefit plan requires a lot of administrative work and commitment to fund the plan with a certain amount per year. Changing that amount can lead to additional fees. But continuing the plan for a minimum of three years can make it worth it.
On the plus side, you can defer a lot of cash into your retirement account and the taxes until retirement.
Here are the key facts:
Best suited for | A self-employed individual with no employees and a high income who wants to save a lot for retirement |
Contribution limit | Determined by a formula based on your age, desired retirement benefit, and expected investment return |
Tax advantage | Tax-deductible contributions with distributions in retirement taxed as income |
Employee element | If you have employees, you must fund benefits for them too |
An IRA could be considered the easiest retirement plan for self-employed individuals, as there are no special filing requirements. Additionally, you can use it with or without employees.
There are two types of IRA: traditional IRAs offer deductible contributions, while Roth IRAs offer tax-free withdrawals in retirement. Also, there are no income limits for contributions into a traditional IRA. Even though there are these two types of IRA, you can contribute to both in the same year. The only requirement is that your total contributions don’t exceed the annual limit of $7,000 (or $8,000 if you’re over 50).
Here’s what you need to know:
Best suited for | Self-employed starters |
Contribution limit | In 2025: up to $7,000, or $8,000 if over the age of 50 |
Tax advantage | Possibly deductible contributions with a traditional IRA No deduction for Roth IRA, but tax-free withdrawals in retirement |
Employee element | None |
“Keogh plan” was the term used for certain qualified plans for retirement available to self-employed people. These plans could either be defined benefit plans or defined contribution plans, and they allowed for high tax-deductible contributions.
While the plans themselves still exist, the term “Keogh” is now rarely used. That’s because today’s tax law no longer distinguishes between corporate and unincorporated employers. Retirement plans for self-employed people are simply referred to as qualified retirement plans.
Many self-employed people now turn to Solo 401(k)s or SEP IRAs, which can offer many of the same benefits.
Which retirement plan is best for self-employed people depends on various factors such as whether they have employees, how much income they have, and how much knowledge or time they have for administrative tasks. And you don’t have to choose just one; it’s also possible to combine multiple retirement plans.
If you’re just starting out and aren’t making a huge amount of money, a traditional or Roth IRA might be a good fit for you.
As a business owner or self-employed person with no employees, you might consider choosing a solo 401(k) if you can and want to save a lot of money for retirement. Another option could be a defined benefit plan.
Self-employed individuals or small business owners with no or few employees may find a SEP IRA to be suitable, as it has a higher contribution limit than a solo 401(k) and a low administrative burden. Also, it is flexible in that you don’t have to contribute every year.
Business owners of midsize companies with up to 100 employees might find a SIMPLE IRA to be the best option, as it can be fairly easy to set up, and the accounts are owned by their employees.
As always, it can help to discuss your options with a retirement financial advisor or tax professional to find the right option for you.
Certificates of deposit (CDs) can make an ideal option for complementing your retirement plan as a self-employed person. With locked-in interest rates, you have predictable returns as well as flexibility, because you can access your funds from time to time and still earn interest. Compare the top rates from over 75 banks and credit unions and get started today!
The above article is intended to provide generalized financial information designed to educate a broad segment of the public; it does not give personalized tax, investment, legal, or other business and professional advice. Before taking any action, you should always seek the assistance of a professional who knows your particular situation for advice on taxes, your investments, the law, or any other business and professional matters that affect you and/or your business.