When you're self-employed, you can still access employer-sponsored retirement plans. But setting up and managing the plan is one of the many tasks you'll need to take on as a business owner. Fortunately, you can choose from different options, and you may be able to switch plans based on your needs, goals for retirement and whether you have (or want to hire) employees.
Self-Employed Retirement Planning Overview
Retirement plans for self-employed business owners can offer tax advantages, contribution opportunities and rules similar to those of traditional employer-sponsored retirement plans—but with some important differences. Here's what to know:
- Tax advantages: Self-employed retirement accounts can offer tax advantages, such as tax deductions for contributions and tax-deferred or tax-free growth, helping maximize your long-term savings.
- Max contribution limits: Be mindful of how much you can contribute to the account each year as an employee and how much your company contributes to your retirement account on your behalf. The limits may change annually, so be sure to check with the IRS each year.
- Withdrawal limits: As with traditional retirement accounts, you generally must pay a penalty for withdrawing money from a retirement plan before you turn 59½. However, different types of accounts offer penalty-free exceptions.
As a business owner, you'll also need to consider the time and cost of setting up and managing a plan, along with the rules regarding who can participate (if you have employees) and how much you can contribute based on your income and business structure.
4 Types of Self-Employed Retirement Plans
As a self-employed business owner, you have several retirement plan options to choose from—ranging from simple individual retirement accounts (IRAs) to more complex options like profit-sharing and defined benefit plans. But many small business owners, especially those focused on saving for their own retirement, tend to pick from several types of individual retirement accounts (IRAs) and 401(k)s. Here's a quick overview of four popular options.
1. Traditional and Roth IRAs
If you're self-employed and want a simple, flexible way to save for retirement—without needing to set up a formal business retirement plan—traditional and Roth IRAs can be solid options. These accounts are available to almost anyone with earned income, regardless of whether you work for yourself or someone else.
- Setting up an account: Unlike employer-sponsored plans, IRAs are individual accounts that don't require a company to create or manage the plan.
- Contribution limits: You can contribute up to the IRS limit for the year (with a higher catch-up amount if you're 50 or older), or your total taxable compensation—whichever is lower. The limit applies to your combined contributions to all traditional and Roth IRAs you own, and your contributions to other types of IRAs may affect your contribution limits.
- Employee rules: Employees open their own traditional or Roth IRA—their employers generally aren't involved. However, some states have state-sponsored IRAs, and small business owners may need to register, participate and automatically enroll employees in a state-sponsored program if the business doesn't offer an alternative qualified retirement plan.
- Tax advantages: Traditional IRAs may offer an up-front tax deduction for your contributions, with taxes due when you withdraw money in retirement. Roth IRA contributions aren't deductible, but you can withdraw your contributions at any time without penalty. The earnings from a Roth IRA will also be tax-free as long as you follow the IRS rules.
2. SIMPLE IRAs
A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a special type of IRA for small businesses. You can use this type of retirement account if you have 100 or fewer employees.
- Setting up the plan: The process is generally easier and cheaper than creating a 401(k) or other type of retirement plan for your business. You will need to file a form with the IRS to kick-start the plan, but there are no annual filing requirements for employers.
- Contribution amounts: Employers must contribute 2% to 3% of each eligible employee's compensation to their SIMPLE IRA account. Employees can also contribute to their own account, up to the annual limit.
- Employee rules: The ongoing annual contribution requirement can make SIMPLE IRAs less flexible than other options.
- Tax advantages: You can have a traditional or Roth SEP-IRA, and the account offers similar tax advantages as traditional and Roth IRAs.
3. SEP-IRAs
A Simplified Employee Pension (SEP) plan is another type of IRA. Unlike SIMPLE IRAs, there's no limit on how many employees you can have—any sized business can open a SEP-IRA. So whether you're a solo freelancer or you employ 150+ people, a SEP-IRA could be an option.
- Setting up the plan: SEP-IRAs are also relatively easy to set up and run, with minimal administrative costs. If you start a SEP-IRA, you must create a written agreement and offer the plan to all eligible employees. The IRS has a sample agreement you can use. Once you establish the plan, there are no annual filing requirements for employers.
- Contribution limits: Employers can contribute up to 25% of an employee's pay, capped at a set dollar amount. If you're self-employed, your limit is based on your net earnings after adjusting for self-employment taxes and SEP-IRA contributions. Employees aren't allowed to contribute to their SEP-IRA accounts.
- Employee rules: You must set up a SEP-IRA for every eligible employee, and contributions must be made at the same percentage of pay for every employee—including the owner. However, you can vary how much you contribute each year, and even pause contributions if you need the money for other expenses.
- Tax advantages: You can have a traditional or Roth SEP-IRA, and the account offers similar tax advantages as traditional and Roth IRAs.
4. Solo 401(k) plans
A solo 401(k) is a retirement plan for self-employed business owners with no employees other than a spouse. These are also called a one-participant 401(k) and individual or i401(k).
- Setting up the plan: You'll need to open the plan with a financial institution, and if the plan holds more than $250,000 in assets, you must file Form 5500-EZ annually.
- Contribution limits: As the employer, you can contribute up to 25% of your earned income. As the employee, you can contribute up to the yearly 401(k) limit (plus extra if you're 50 or older).
- Employee rules: You can't have employees other than yourself and your spouse.
- Tax advantages: You can create a traditional or Roth solo 401(k), and they offer similar tax advantages as traditional and Roth IRAs.
How To Choose the Right Retirement Plan
There are many factors to consider when choosing a retirement plan for your small business, including:
- How much you plan to contribute each year
- The setup costs, ongoing fees and filing requirements
- Whether you have (or plan to hire) employees
- The tax advantages of each plan
The IRS and the Department of Labor's Employee Benefits Security Administration created a helpful brochure with a detailed side-by-side chart that includes the plans above and several other options for small business owners.
Once you've narrowed down your choices, review the rules and details for the particular plan to make sure it aligns with your needs and your long-term business goals. If you're unsure or want a second opinion, you could talk with a professional who specializes in retirement planning for self-employed people.
Implementing Your Retirement Strategy
A retirement plan can offer tax incentives and benefits, but the next step is to figure out how the plan fits into your retirement strategy. If you haven't already done so, try to calculate your retirement number, such as how much money you'll need to retire and when you want to retire.
From there, you can start working backward to figure out how much you'll ideally contribute to your retirement plan each month. If you can't contribute that amount right away, see if you can start small and build up over time.
READ MORE: What's the Median Retirement Savings by Age?
Frequently Asked Questions
How do traditional retirement plans compare to self-employed retirement plans?
Many retirement plans for self-employed business owners share similarities with the plans offered by traditional employers—especially in terms of tax advantages and basic contribution rules. For example, a solo 401(k) follows many of the same rules as a regular 401(k), but it's designed for business owners with no employees other than a spouse.
The biggest difference? As the business owner, you're responsible for setting up and managing the plan yourself—there's no employer benefits department to handle the details for you. Additionally, you control how much your business contributes to your plan, and you can potentially contribute more each year than you could while working for someone else.
Can I have multiple retirement accounts?
Yes, you can have multiple retirement accounts—and some people even intentionally save for retirement with both traditional and Roth accounts. However, review the contribution and deduction rules, particularly if you want to use multiple IRAs.
How do tax deductions work for self-employed retirement plans?
With a self-employed retirement plan, you can often deduct the contributions you make, but where you claim the deduction depends on your business structure and the type of plan. Depending on the type of business entity you have, you might deduct the contributions on your personal taxes or deduct contributions from company revenue as a business expense. The IRS has specific rules for each plan type, so checking those—or working with a tax pro—can help ensure you maximize your deductions.
Retirement Planning for the Boss (That's You!)
Planning for retirement as a self-employed business owner comes with extra responsibilities—but also the flexibility to choose a plan that fits your goals. Whether you want to maximize contributions, keep things simple or offer benefits to future employees, the right retirement plan can help you build long-term financial security.
Synchrony Bank offers a variety of savings options that can complement your retirement strategy, giving you even more tools to help your hard work pay off—both now and in the future.
READ MORE: Pros and Cons of 5 Popular Early Retirement Strategies
