As a self-employed individual, you have many of the same options to save for retirement as employees participating in company plans.  Each of these options has its own eligibility criteria, contribution limits and tax benefits. Let’s explore some of the most common self-employed retirement saving options:

• Individual Retirement Account (IRA): (includes Traditional IRA and Roth IRA):
  • Eligibility: Available to any individual with earned income, including self-employed individuals.
  • Contribution Limits (2023): For both Traditional and Roth IRAs, the maximum contribution is $6,500 ($7,500 if age 50 or older). However, the deductibility of Traditional IRA contributions may be limited based on your income and whether you or your spouse have access to a workplace retirement plan.  The contribution limit for Roth IRAs can be reduced to zero for high income earners.
  • Tax Advantages: Traditional IRA contributions may be tax-deductible, reducing your taxable income for the year. The principal and any growth in value are tax-deferred until withdrawal. Roth IRA contributions are made with after-tax money and qualified withdrawals in retirement of both principal and any growth are tax free.
  • Pros: Easy to open and manage, diverse investment options, and flexibility in choosing between Traditional or Roth IRA if your earnings does not exceed a certain income level.
  • Cons: Lower contribution limits compared to other retirement plans.
• Simplified Employee Pension (SEP) IRA:
  • Eligibility: Available to self-employed individuals, small business owners, and business owners with employees
  • Contribution Limits (2023): The contribution is entirely made by the employer (you, as the self-employed individual). You can contribute up to 25% of your net self-employment income or up to $66,000 (or $73,500 for those age 50 or older), whichever is less.
  • Tax Advantages: Contributions are tax-deductible, reducing your taxable income for the year. The principal and earnings grow tax-deferred until withdrawal, and you can still have other IRAs or retirement accounts.
  • Pros: Easy to set up and administer, high contribution limits, and minimal ongoing paperwork.
  • Cons: Limited to employer contributions only; potentially higher costs if you have employees.

• SIMPLE IRA (Savings Incentive Match Plan for Employees):
  • Contribution Limits (2023): The self-employed wears two hats in a SIMPLE IRA plan: employee and employer. As an employee, you may make salary deferral contributions up to $15,500 ($19,000 for those older than 50) in this plan. As an employer, you can match your own contributions dollar-for-dollar, up to 3% of the compensation. Alternatively, you can make a non-elective contribution of 2% of your compensation, subject to a maximum total contribution of $66,000 per year (or $73,500 for those age 50 or older).
  • Eligibility: Available to small businesses with 100 or fewer employees, including self-employed individuals.
  • Tax Advantages: Contributions are tax-deductible, reducing your taxable income for the year. The account grows tax-deferred until withdrawal.
  • Pros: Easy to establish and maintain, affordable, and flexibility in contributions (as both employer and employee).
  • Cons: Salary deferral is lower than Solo 401(k) (see below). Administrative responsibilities and costs may increase as the plan grows, especially if you hire employees.

• Solo 401(k) (Individual 401(k) or One-participant 401(k)):
  • Eligibility: Available to self-employed individuals or business owners with no full-time employees other than a spouse.
  • Contribution Limits (2023): The self-employed wears two hats in a Solo 401(k) plan: employee and employer.  As an employee, you can make salary deferral contributions of up to $22,500 ($30,000 if age 50 or older). As an employer, you can contribute up to 25% of your net self-employment income. The total contributions for each spouse cannot exceed the $66,000 limit (or $73,500 for those age 50 or older).
  • Tax Advantages: Contributions are tax-deductible, reducing your taxable income for the year. The account grows tax-deferred until withdrawal, and you have the option of making Roth contributions, which won’t provide immediate tax benefits, but qualified withdrawals in retirement will be tax-free.
  • Pros: High contribution limits, especially if a spouse also earns income from the business, potential tax savings, flexibility in contributions (as both employer and employee), and investment choices.
  • Cons: A solo 401(k) plan is generally required to file an annual report on IRS Form 5500-EZ if it has $250,000 or more in assets at the end of the year. 

• Defined Benefit Plan:
  • Eligibility: Suitable for self-employed individuals with higher incomes who want to contribute a significant amount to their retirement savings.
  • Contribution Limits: There is no explicit contribution limit, which depends on various factors, such as your age, income, and desired benefit amount in retirement. There is a limit on annual retirement benefits of up to $265,000. You need to work with an actuary to design the plan, including calculating a required contribution amount that will produce the desired retirement benefit.
  • Tax Advantages: Contributions are tax-deductible, reducing your taxable income for the year. The account grows tax-deferred until withdrawal.
  • Pros: High contribution limits, potential for substantial tax deductions, and can provide a predictable retirement benefit.
  • Cons: Higher administrative costs and complexities compared to other retirement plans.

It’s essential to consider your income, business structure, retirement goals, and tax planning when choosing a retirement saving option. The best plan for you will depend on your specific situation and financial objectives. Consult with a financial advisor and tax professional to determine which options align best with your needs and help you achieve your retirement goals effectively. A financial advisor can also help you to choose the financial institutions where low-cost solutions of these retirement plans are offered.