The 4 Best Self-Employed Retirement Plans

The 4 Best Self-Employed Retirement Plans

by Feb 21, 2019Retirement Planning

Successfully running your own business can be one of the most challenging-yet-satisfying experiences life has to offer. The freedom that most self-employed individuals enjoy can be very liberating, but the lack of included safety nets (like employer-sponsored retirement plans) can be stressful at the same time.

If you’re self-employed and worried about having a solid retirement plan in place, this article is for you. Here are the four best self-employed retirement plans available to anyone running their own business.

1) Traditional or Roth IRA

IRA stands for Individual Retirement Account, and they are almost always the easiest way for the self-employed to start saving for retirement. There are no special requirements to open an IRA, and you can start one even if you’re the only employee in your business.

There are some important differences between traditional and Roth IRAs, so you should definitely speak with a financial planner before opening an account.

IRA Quick Facts

Best For: Anyone just starting to save for retirement, and those saving less than $6,000 per year. If you have an existing 401(k) from a previous employer, you can roll that into your IRA.

Tax Advantages: Traditional IRA contributions are tax deductible. Roth IRA contributions are not, but withdrawals after retirement are tax-free.

Employee Requirements: None. IRAs are individual plans. If you do have employees, they can set up their own IRAs if they want to.

2) Solo 401(k)

Solo 401(k) retirement plans are great if you plan on putting a lot of money into your retirement account over the course of your professional life. It’s also a good option if you want to put a lot aside in years that you do well, and less in those years when you don’t.

For 2019, the contribution limit for a solo 401(k) is $56,000 (plus $6,000 catch-up contribution for those 50 or older) or 100% of earned income, whichever is less.

Solo 401(k) Quick Facts

Best For: All self-employed workers and business owners with no employees.

Tax Advantages: Contributions to this self-employed retirement plan are made pre-tax. Distributions after age 59.5 are taxed.

Employee Requirements: You cannot contribute to a solo 401(k) if you have any employees.


SEP stands for Simplified Employee Pension. In practice, SEP IRAs function similarly to solo 401(k) accounts, but have some very important differences. The primary difference is that you, as the business owner, are required to make contributions for your employees.

Additionally, those contributions must be equal, not in dollar amount, but in percentage of pay, to the contributions you make for yourself. This means that if you contribute ten percent of your own earnings into a SEP IRA, you must also make contributions for each employee that is equivalent to ten percent of their pay as well.

SEP IRA Quick Facts

Best For: Small business owners with few employees

Tax Advantages: You can deduct either the total of your contributions or 25% of your net self-employment earnings, whichever is less.

Employee Requirements: Employers must contribute an equal percentage of salary for each eligible employee, including yourself.

4) Defined Benefit Plan

A defined benefit plan is, for all intents and purposes, a pension plan for the self-employed. It’s a guaranteed stream of income once you hit retirement, and it isn’t affected by market performance. Defined benefit plans also allow you to put a lot of money into them. Think upwards of $50,000 to $80,000 per year.

The drawback to a defined benefit plan is that it is the most expensive of all self-employed retirement plans to set up and maintain over time. There are (usually) high annual fees, they require you to commit to fund the plan with a certain amount per year.

Defined Benefit Plan Quick Facts

Best For: People who are self-employed, have high income, and want to save a lot of money for retirement on an ongoing basis.
Tax Advantages: Contributions to a defined benefit plan are usually tax deductible. Distributions after retirement are taxed.

Employee Requirements: If you have employees, you will likely need to offer this plan to them and make contributions on their behalf.

Which Plan Is Right For You?

Choosing only one among these four self-employed retirement plans can be difficult. The right choice often depends on where you and/or your business are currently at, and what your income level is.

One of the best ways to get guidance on what the best option is for you, is to speak with an experienced financial planner who can help you evaluate your financial goals, both now and after you retire. By understanding your goals first, a financial planner can help you choose the right retirement plan to achieve them.

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