The Different Self-Employed Retirement Plans

Self employed retirement plans

Self-employed retirement plans can help small business owners secure their financial future. But if you are self-employed, it's very easy to stay focused solely on generating income and profits in your business. Many business owners have a bulk of their money tied into their business ventures especially in the early stages. As a result, have very little financial wiggle room for retirement savings.

Studies from show that 34% of business owners have no retirement savings. In addition, 40% of business don't feel comfortable about retiring based on their financial standing.

However, it's very important that you establish a retirement plan to save for retirement early. And this is regardless of what your long-term business financial projections look like. And that plan should be more than just contributing to a traditional IRA. This is where self-employed retirement plans come into play. in this article we'll cover the various options!

The importance of retirement plans for the self-employed

Unfortunately, businesses fail or can take a long time to get to the point where they start returning a profit. So relying on your business as your "retirement plan" is not a good approach because you risk lost time. In addition, you risk the loss of potential earnings you could get from the growth of your retirement accounts. And let's not forget the power of compounding.

That being said, saving for retirement can be tricky for you as a self-employed individual due to inconsistent income. It's also impacted by the fact that you have to research and establish your retirement savings on your own. This is in comparison to if you worked for an employer that has already laid the groundwork for you.

However, with a little effort, you can create a plan for your retirement. By doing this you will have multiple fronts to build long-term wealth - your retirement savings and your business.

The different self-employed retirement plans

There are five main self employed retirement plans that you can set up to save for retirement and they include:

1. The Traditional IRA (Individual Retirement Account)

A traditional IRA allows anyone, including self-employed individuals, to contribute to their retirement in a tax-advantaged way. As of 2024, you can contribute up to $7,000 of your pre-tax income into a traditional IRA, according to the IRS, or $8,000 if you are over the age of 50. With that, your investments will be able to grow in a tax-deferred way until retirement age.

Pros of the Traditional IRA

The major benefit of a traditional IRA is that you can contribute in a tax-deferred way. As you contribute pre-tax income, you will defer your tax obligations until a later date.

Cons of the traditional IRA

The lower contributions limits set on a traditional IRA make it a retirement account that will likely need complementary retirement account to fully fund your retirement. Additionally, there are significant early withdrawal penalties if you take out funds before age 59.5 without a qualifying reason.

The 10% penalty can be avoided if you are taking out funds for your first home purchase, qualified educational expenses, medical expenses, or a handful of other rare instances.

2. The SEP-IRA (Self-Employed Individual Retirement Account)

The SEP-IRA plan is similar to a traditional IRA in that it is tax-deductible and is great if you are the sole employee of your business. You can contribute up to 25% of your income up to a maximum of $69,000 in 2024 to this retirement account the IRS explains.

It's important to note that, if you have other employees you will need to fund a SEP-IRA for them as well and make equal percentage contributions.

Pros of SEP IRA

The large contribution limit to a SEP IRA is a great advantage. When combine with the tax-deferred benefits, this retirement account can be a great option for self-employed individuals.

Cons of SEP IRA

Although a SEP IRA can be a great option for self-employed individuals, you'll need to include the costs of setting up and funding your employee SEP IRAs. As a small business owner with several employees, large contributions could be cost prohibitive.

3. The SIMPLE (Savings Incentive Match Plan For Employees) IRA

A SIMPLE IRA plan is specific to business owners who have 100 or fewer employees. Contributions are taken out pre-taxes and the maximum contributions made into your account cannot exceed more than $16,000 in 2024, or $19,500 for people over the age of 50, according to the IRS. As an employer, you will have to make a mandatory matching contribution of up to 3% of the employee's pay.


As a business owner, the SIMPLE IRA is a streamlined investment vehicle with minimal administrative requirements. With lower setup costs and maintenance costs than some retirement plans, the SIMPLE IRA could be a good fit.


The major downside of the SIMPLE IRA is the mandatory employer contribution. Additionally, the steep 10 to 25% penalty on withdrawals made before age 59.5 can be a steep cost to avoid.

4. The Self Employed 401(k), also known as a solo 401(k)

A self employed 401(k) plan is specific to self-employed individuals with no employees other than a spouse and no plans to add future employees. The great thing about this plan is that you are allowed to make contributions to your retirement savings as the owner of your business and also an employee in your business.

The contribution limit is 100% up to the annual contribution limits (401ks are $23,000 for 2024) for elective deferrals and employer non elective contributions up to 25% of compensation, see IRS guidelines for details.

Pros of the self employed 401(k)

Like a traditional 401(k), the contributions made to this account at tax-deferred. Once you contribute, you'll be in charge of your investment portfolio. With that, you'll be able to build an investment portfolio that suits your needs.

Cons of the self employed 401(k)

The administrative costs of setting up and running and solo 401(k) can be relatively expensive. With that, it is important to compare the costs of different solo 401(k) providers to ensure that the costs are minimal.

5. The Defined Benefit Plan

When you think of a defined benefit plan, you likely think of pension plans set up for long-term employees in certain industries. But as a self-employed individual, you have the ability to set up your own defined benefit plan.

A defined benefit plan will need to be set up with the help of an actuary who can help determine your retirement payouts based on your age, expected plan returns, and your monthly contribution. The annual benefit cannot exceed 100% of the participant's average compensation for their highest-paid three calendar years with a benefit limit of $275,000 in 2024, according to the IRS, whichever is less.

Pros of a defined benefit plan

A defined benefit plan allows for high contributions and tax-deferred growth. Plus, you'll have more control and peace of mind in retirement with a defined benefit plan that doesn't have any fluctuations.

Cons of a defined benefit plan

A defined benefit plan can be relatively complicated to set up. In addition to a complicated set up, you'll likely deal with expensive administrative costs. Once the defined benefit plan is set up, your business will be on the hook for the determined contributions which can be a burden in difficult economic times.

Tips to successfully save for retirement if you are self employed

Saving for retirement is important, especially if your are self-employed. Here are some tips to help you save successfully with the help of self-employed retirement plans

1. Determine what your retirement will cost you

A great place to start is to figure out how much you will need to live on each year when you get to retirement. You want to multiply this number by the retirement average of 20 to 25 years. This way you can set a goal towards how much you'll need to save each year in order to reach your savings milestone.

2. Set up your retirement accounts

Once you've established the amount you need to save over the long term, it's time to set up your retirement accounts. Do your research to find the best retirement accounts with low costs to help you achieve your retirement goals.

3. Keep your investments simple

Once you've established the retirement plan(s) you want to use, it's time to start investing. I highly recommended keeping your investments simple and well-diversified (e.g. via index funds) that align with your investment objectives.

A good place to learn how to invest is through our free courses. With this knowledge base, you'll be better prepared to make the right investment decisions for your situation.

Note: If you struggle with finding the right plan, choosing the right kind of investments or determining your eligibility, save yourself the stress and talk to a qualified financial advisor about your objectives so they can provide you with the guidance you need.

4. Set reminders to make your contributions no matter how small

If you are self-employed and you don't have a payroll system in place, ensure you don't miss out on making contributions to your retirement savings, by automating your transfers so they happen each time you get paid. If you have an inconsistent income set reminders on your calendar so you remember to make your transfers manually when you get paid (or pay yourself).

In closing

Building long term wealth takes time and if you are self-employed, you definitely want to take advantage of the time you have before you retire to begin saving for your retirement in addition to building up your business empire.

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