One of the benefits people give up when they leave employment is the workplace retirement plan, often with an employer contribution. Self-employed people can build their own, and several plan types exist specifically for small businesses and one-person operations. The choice can seem complicated, but it comes down to a few practical questions. This section explains the main options and how to choose among them.
Why it is worth planning for
Retirement saving competes with every other demand on a self-employed person's money, and it is easy to postpone in years when income is uneven. But the plans available to small businesses can allow substantial tax-advantaged saving, and the habit of contributing regularly matters more over decades than the choice of plan. Building retirement contributions into your pricing, as an employer would build in benefits, is a sensible starting point.
The main options
- Traditional and Roth IRAs are open to anyone with eligible earned income, subject to income rules for some features. Contribution limits are relatively low, but they are simple and flexible.
- SEP-IRA: a Simplified Employee Pension plan funded only by employer contributions. Easy to set up and run, with flexible annual contributions, but contributions must be made for eligible employees at the same rate.
- Solo 401(k): a 401(k) plan for a business owner with no employees other than a spouse. It allows contributions in two roles, as employee and as employer, and may offer a Roth option, with more paperwork once assets grow.
- SIMPLE IRA: a plan for small employers with employee salary deferrals and required employer contributions.
- Defined benefit plans: more complex plans that can allow large contributions for high, stable incomes, usually requiring professional administration.
Each has annual limits set by the IRS, and the guides in this section give them with the tax year stated.
Questions that narrow the choice
- Do you have employees, or plan to? Some plans become expensive or complicated once employees are eligible.
- How much do you want to contribute? Plans differ in how much a self-employed person can put away at a given income.
- How regular is your income? Plans with flexible contributions suit uneven years.
- How much paperwork will you accept? Simpler plans have fewer filings.
- When are you deciding? Plans have different deadlines for setting up and funding.
Deadlines matter
Some plans can be set up and funded after the year ends, up to the tax filing deadline. Others must be established during the year. If you are reading this late in the year, check the setup deadline for the plan you are considering before assuming you can wait.
Calculating your contribution
Contribution calculations for self-employed people differ from those for employees, because your compensation is based on net earnings from self-employment after certain adjustments. The IRS publishes worksheets for the calculation, and the guides walk through them with examples.
Getting help
Financial institutions that offer these plans provide setup documents and can explain their accounts. A tax professional can help calculate the maximum contribution and confirm the deduction. For complex plans, professional administration is normally required.
The guides in this section
The guides cover the SEP-IRA, solo 401(k), SIMPLE IRA, IRAs for the self-employed and how to compare them. Start with the SEP-IRA guide if you want the simplest employer-style plan, and the solo 401(k) guide if you have no employees and want to compare contribution room.
Guides in this section
- SEP-IRA for the self-employed
How a SEP-IRA works for a one-person business: setup, contribution rules, deadlines and employees.
- Solo 401(k): how a one-participant plan works
Who can use a one-participant 401(k), the employee and employer contribution types, how self-employed compensation is figured, and the reporting duties.