Working for yourself has its perks, but without a traditional 401(k), you'll have to find other ways to save for retirement. Investing early and often is the general rule. Whether you're a one-person operation or own a small business with employees, there are lots of tax-friendly ways to build your nest egg. Consider these five options if you're looking for a self-employed retirement account.
1. Traditional Individual Retirement Account (IRA)
You can open and fund a traditional IRA on your own, apart from your business. That can allow for tax-deductible contributions as you save for retirement. IRAs are available through online brokers, robo-advisors, banks and credit unions.
Pros
- It's fast and easy to open an IRA.
- You can take a tax deduction on 100% of your contributions if you and your spouse don't have access to a workplace retirement plan. (If you do, your deduction might be capped.)
- You won't owe taxes until you make withdrawals.
Cons
- Contribution limits are much lower than 401(k)s. In 2024, you can contribute up to $7,000 across all your IRAs (or $8,000 if you're 50 or older).
- Distributions count as taxable income, which could push you into a higher tax bracket. Withdrawing funds before age 59½ will likely trigger an extra 10% penalty.
- Required minimum distributions (RMDs) begin at age 73.
Who It's Best For
A traditional IRA may be a good self-employed retirement account if you're hoping to reduce your taxable income during your working years. That could make sense if you expect to be in a higher tax bracket today than in retirement.
2. Roth IRA
A Roth IRA is structured differently than a traditional IRA. It's funded with after-tax dollars and can be a nice addition to your savings plan, but there are potential drawbacks to consider.
Pros
- Your account balance will grow tax-free.
- Since you've already paid taxes on the money you've put in, you can withdraw your contributions at any time without paying taxes or penalties.
- RMDs do not apply (unless it's an inherited Roth IRA).
Cons
- If you've had the account for less than five years and are younger than 59½, withdrawing investment earnings could trigger a tax bill and early withdrawal penalty.
- Contributions are not tax-deductible.
- Contribution limits begin to phase out for higher earners. You cannot contribute at all if you earn more than $161,000 (or $240,000 if you're married and filing a joint tax return).
Who It's Best For
A Roth IRA can be helpful at any age, but it may be extra appealing to younger workers who expect their tax liability to be greater in retirement.
3. Solo 401(k)
This type of self-employed retirement account is similar to a traditional 401(k). The main difference is that a solo 401(k) is designed for business owners and career freelancers who don't have any employees.
Pros
- You can contribute to a solo 401(k) in two ways. As an employee, you can contribute up to $23,000 in 2024 (or $30,500 if you're 50 and older). As the employer, you can also kick in an extra 25% of earned income.
- Your spouse can participate in the plan if they earn income from the business.
- Employee contributions are tax-deductible, and employer contributions count as a business expense.
Cons
- You'll be taxed on withdrawals, which will create a tax bill in retirement.
- Withdrawing funds before age 59½ will likely result in a 10% early withdrawal penalty—on top of taxes.
- RMDs begin at age 73.
Who It's Best For
Self-employed workers or business owners who don't have any employees and want to save more than IRAs allow will find the most benefit from solo 401(k)s.
4. SEP IRA
Simplified employee pension (SEP) IRAs are taxed like traditional IRAs but allow self-employed folks to save more for retirement. They also let business owners make contributions on behalf of their employees.
Pros
- You can contribute up to $69,000 in 2024 or 25% of your compensation (whichever is less). The maximum compensation amount is $345,000.
- SEP IRAs offer more versatility than individual IRAs. They're also easier to manage than 401(k)s.
- Contributions are fully vested, so you and your employees can access that money at any time.
Cons
- There's a detailed process to get going, which involves setting up an account for every eligible employee.
- Unlike 401(k)s and traditional IRAs, SEP IRAs do not allow catch-up contributions.
- The contribution rate must be equal for all employees, including yourself.
Who It's Best For
This type of account is great for business owners who want to save for retirement and help their employees do the same. SEP IRAs are ideal for self-employed folks who have a small team.
5. SIMPLE IRA
A savings incentive match plan, or SIMPLE IRA, is geared toward business owners who have a maximum of 100 employees. It allows them to save for retirement and also contribute to their employees' accounts. You can offer a dollar-for-dollar match on employee contributions, or make a flat 2% contribution.
Pros
- Contribution limits are higher than an individual IRA. In 2024, participants can contribute up to $16,000 of their earnings. Those who are 50 and older can put in an extra $7,500.
- As the employer, contributions are tax-deductible.
- A SIMPLE IRA can be an attractive employee benefit that helps with recruitment and retention.
Cons
- Employer contributions are required, and you must contribute the same rate for all eligible employees.
- Contribution limits are lower when compared to SEP IRAs and solo 401(k)s.
- Distributions are taxable, and there's a 10% early withdrawal penalty for tapping funds before age 59½. That penalty jumps to 25% for withdrawals made within the first two years of participation.
Who It's Best For
Business owners who want to save for retirement and have no more than 100 employees may benefit most from SIMPLE IRAs. They can also make sense if you're looking to improve your employee benefits package.
Other Ways to Save for Retirement
- Health savings account (HSA): You can withdraw HSA funds tax- and penalty-free if you use the money to cover qualified medical expenses. Contributions are tax-deductible, and interest and investment earnings grow tax-free. Once you turn 65, you can use HSA money for retirement income, though you'll be taxed on withdrawals. You must be enrolled in a high-deductible health plan to contribute to an HSA.
- Brokerage account: This type of investment account can provide additional income in retirement. Brokerage accounts don't offer tax benefits, but there are no RMDs or contribution limits. You can also dip into your funds whenever you like without penalty. You can expect to be taxed on gains during the year they're realized.
Frequently Asked Questions
The right retirement savings target for you will depend on your goals, age and financial situation. As a general rule, it's wise to save 15% of your income in your 20s and 30s, and 20% in your 40s and beyond. Fidelity Investments suggests having 10 times your annual salary saved by the time you're 67, but the right target for you will depend on your lifestyle, debt load and other factors.
If you're reporting your earnings to the IRS and paying Social Security taxes, those factors will determine your eligibility for Social Security benefits in retirement. When you work for an employer, these taxes are deducted from your paycheck. Self-employed people have to pay them directly to the IRS.
It depends on the retirement plan. Contributions made to a traditional IRA, solo 401(k) or SIMPLE IRA, for example, are tax-deductible. That will reduce your taxable income, which should also reduce your tax liability.
The Bottom Line
If you work for yourself, there are plenty of ways to save for retirement—and many offer some nice tax advantages. You might opt for a self-employed retirement account that benefits your employees too.