The Best Retirement Accounts for the Self-Employed
When you’re self-employed, saving for retirement is entirely up to you—there’s no employer-sponsored 401(k) plan you can rely on. This can make planning for retirement difficult, but there are several retirement account options available specifically for the self-employed. You’ll still want to take full advantage of tax-advantaged retirement accounts—they allow your money to grow tax-deferred until retirement, when you’ll likely be in a lower tax bracket.
SEPTEMBER IRA
A Simplified Employee Pension (SEP) IRA is one of the easiest small business retirement plans to set up and maintain. With a SEP IRA, an employer can make substantial contributions for itself and its eligible employees. Little administrative work is required and no special tax reporting is required. Employers have the option to vary contribution amounts from year to year, skip years, or contribute one year and never again.
The plan allows you to contribute up to 25% of your net self-employment income each year, with a maximum contribution of $69,000 in 2024 (up from $66,000 in 2023). SEP IRAs are easy to open at most financial institutions and have low fees and administrative costs.
Now, if you’re self-employed and haven’t heard of SEP IRAs, it’s probably because they’re most beneficial for those who employ others along with them . With a SEP IRA, contributions are not employee-funded (like how a 401(k) works). Instead, the SEP IRA is employer-sponsored. Moreover, employers who make contributions to their own account must make contributions to matching employee accounts.
SIMPLE IRA
An Employee Incentive Savings Plan (SIMPLE) IRA works well if you have employees because it allows them to contribute as well. The IRS describes it as ideal as a “starter retirement plan” for small employers who are not currently sponsoring a retirement plan. If you run a small business with fewer than 100 employees, lower start-up costs and ease of setup are why you may want to choose a SIMPLE IRA over a 401(k).
Solo 401(k)
If you run a business without employees , a solo 401(k) option may be right for you. As an employer and (your own) employee, you can contribute $69,000 in 2024, or $76,500 for those age 50 or older. Compared to the options described above, the solo 401(k) option requires more administrative effort up front, but gives you much higher contribution limits.
Traditional or Roth IRA
Now let’s get back to basics. Most self-employed individuals investing for their retirement will choose a Roth or traditional IRA. Although contribution limits are lower than SEP IRAs and individual 401(k)s, an IRA is a personal retirement account that you open on your own.
There are two main types of IRAs: traditional and Roth. Simply put, with a Roth IRA, you pay taxes on your savings right now. With a traditional IRA, you pay taxes later. We’ve written more about the differences here , and overall I lean toward Roth over traditional approaches.
There is no limit to the number of traditional individual retirement accounts, or IRAs, you can open. However, if you set up multiple IRAs, you won’t be able to contribute more than the contribution limit across all of your accounts in a given year. The annual IRA contribution limit will be $7,000 in 2024, up from $6,500 in 2023. You can and should increase these limits as much as possible if possible.
If you or your spouse do not earn taxable income, one of you may consider creating a spousal IRA . That way, you won’t have to miss out on tax-deferred growth and retirement assets in your name just because you’re not in the traditional workforce.
Bottom line: Save early and save consistently.
Regardless of your employment status, here’s my guide to all the different retirement accounts you can use. And whichever account is right for you, the key is to start saving money as early as possible and make regular contributions every year. Maximize your contribution whenever possible and invest appropriately to ensure long-term growth. With disciplined savings over many years, these contributions can potentially add up to a significant amount.
Also, review your retirement needs periodically and make adjustments to your savings rate if necessary. The sooner you start saving for retirement while being self-employed, the better off you’ll be in the future.