Self-employed retirement plans: 5 plans & how they compare

Being your own boss can be an exciting and fulfilling career choice. Nearly 17 million Americans are self-employed. But while you may thrive on the freedom of running your own business, it means you're responsible for making critical financial decisions for your future—including setting up a retirement savings plan.

Working for yourself means you're not limited to the retirement plans offered by traditional employers. You can pick from a variety of self-employed retirement plans and choose the one that maximizes your savings potential, provides tax advantages and aligns with your long-term goals.

Here we’ll provide an overview of five popular retirement plan options for the self-employed.

A solo 401(k) is for self-employed people who either don't have employees or only employ their spouse. This retirement plan allows you to contribute as both an employee and an employer, maximizing your savings potential.

In 2024, you can contribute up to $23,000 as an employee. As the employer, you can contribute up to an additional 25% of your compensation. Your total contribution can go up to $69,000, with an extra $7,500 in catch-up contributions if you're 50 or older. The total contribution limit cannot exceed 100% of your compensation.

• High contribution limits. A solo 401(k) offers some of the highest contribution limits among retirement plans, significantly boosting your savings potential.

• No income restrictions. Regardless of your income level, you can take advantage of the benefits of a solo 401(k).

• Potential for business borrowing. Many retirement accounts allow loans or hardship withdrawals, but a solo 401(k) lets you borrow up to 50% of your plan value or up to $50,000 of invested funds (whichever is less).

• Pros: Being able to contribute to a solo 401(k) as both an employee and employer allows for higher overall contributions. Depending on your tax strategy and preferences, you can choose between traditional (tax-deductible) or Roth (post-tax) contributions.

• Cons: These plans can be more complex to set up and maintain than other options. Also, the investment options within a solo 401(k) may be limited compared to an IRA.

Learn more about solo 401(k)s

A Simplified Employee Pension (SEP) IRA is a popular retirement plan for self-employed people with few or no employees. It offers flexibility and high contribution limits, making it an attractive option for maximizing retirement savings and adjusting contributions based on your business's performance.

In 2024, you can contribute up to 25% of compensation, up to a maximum of $69,000.¹ SEP IRAs don't have catch-up contributions. With the passage of the SECURE Act 2.0, you may be able choose between a traditional or Roth SEP IRA (if available through the institution you choose).

• High contribution limits. SEP IRAs offer some of the highest contribution limits among retirement plans.

• Flexibility. You can decide whether or not to contribute each year and adjust your contribution amount based on your business income.

• Easy to set up and maintain. SEP IRAs are relatively simple to establish and manage, with minimal administrative overhead.

• Pros: SEP IRAs are ideal for self-employed individuals with fluctuating income since you can contribute anytime up to a fairly high maximum. The ease of setting up and maintaining a SEP IRA also makes it a convenient option.

• Cons: SEP IRAs don't allow employee contributions, which can be a limitation if you plan to have employees in the future. There also isn't an option for catch-up contributions for people 50 and older.

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A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a self-employed retirement plan for businesses with up to 100 employees. It offers a streamlined way for employers to contribute to their own and their employees' retirement savings plans.

In 2024, you can contribute up to $16,000 as an employee, with an additional $3,500 in catch-up contributions if you're 50 or older. Employers must contribute to their employees' SIMPLE IRAs through matching or nonelective contributions.

• Lower administrative costs. SIMPLE IRAs have less paperwork and lower setup and maintenance costs than other retirement plans.

• Easy to set up and manage. As the name suggests, SIMPLE IRAs are relatively easy to establish and administer.

• Employer contributions. Employers are required to make contributions either through matching or nonelective contributions, which helps boost employee retirement savings.

• Pros: SIMPLE IRAs are easy to set up and maintain, with lower administrative costs than other retirement plans. Mandatory employer contributions help ensure employees save for retirement, making it an attractive option for small businesses.

• Cons: SIMPLE IRAs have lower contribution limits than SEP IRAs and solo 401(k)s. Additionally, employer contributions are mandatory, which can be a financial burden for some businesses.

A traditional IRA is a retirement savings plan that allows individuals to make pre-tax contributions, which can grow tax-deferred until withdrawals are made in retirement. Traditional IRAs also have a required minimum distribution (RMD) starting either at age 73 or 75, depending on the year you were born.

In 2024, you can contribute up to $7,000 to a traditional IRA, with an additional $1,000 in catch-up contributions if you're 50 or older.

• Tax-deductible contributions. Contributions to a traditional IRA may be tax-deductible, lowering your taxable income in the year you contribute.²

• Tax-deferred growth. Your investments grow tax-deferred until you withdraw them in retirement, potentially leading to larger savings over time.

• Wide range of investment options. Traditional IRAs offer flexibility to invest in various assets, including stocks, bonds, mutual funds and ETFs.

• Pros: Traditional IRAs offer tax-deferred investment growth, which can significantly enhance your retirement savings. Contributions also may be tax-deductible, offering immediate tax benefits. Traditional IRAs have broad eligibility, allowing almost anyone with earned income to contribute.

• Cons: Traditional IRAs have lower contribution limits than employer-sponsored plans like 401(k)s. Withdrawals in retirement are taxed as ordinary income. You must start minimum distributions (RMDs) at age 73 or 75, potentially impacting your tax strategy.

Read more about the benefits of traditional IRAs

A Roth IRA for self-employed workers allows individuals to make post-tax contributions, which can grow tax-free. Unlike traditional IRAs, withdrawals from Roth IRAs in retirement can be tax-free.⁴ There is no RMD requirement for owners of Roth IRAs, which can be transferred tax-free to heirs. However, Roth IRAs have income limits for eligibility.³

In 2024, you can contribute up to $7,000 to a Roth IRA, with an additional $1,000 in catch-up contributions if you’re 50 or older. However, Roth IRA contributions are subject to income limits, which may reduce the amount you can contribute or make you ineligible.³

• Tax-free growth and withdrawals in retirement. Investments in a Roth IRA grow tax-free, and qualified withdrawals in retirement are also tax-free.⁴ The tax advantages can be the key deciding factor for Roth IRAs, especially if you expect to be in a higher tax bracket in retirement.

• No required minimum distributions: Unlike Traditional IRAs, Roth IRAs don't require you to start taking withdrawals at a certain age.

• Flexibility: Your contributions to a Roth IRA can be withdrawn without penalties or taxes, making it a flexible option for retirement savings and other financial needs.

• Pros: Roth IRAs offer tax-free growth and the potential for tax-free withdrawals in retirement, providing significant tax advantages. They also do not have RMDs, allowing your investments to grow longer if you don’t need them immediately. Contributions can be withdrawn without taxes and penalties, offering flexibility for financial needs.

• Cons: Roth IRAs have income limits that may restrict high earners from contributing directly. Additionally, contributions to a Roth IRA are not tax-deductible, meaning you won't see an immediate tax benefit. Contribution limits also are lower compared to some other retirement plans

Learn more about Roth IRA investment options

• Contribution limits. If maximizing contributions is your priority, solo 401(k)s and SEP IRAs offer the highest limits.

• Tax benefits. Traditional plans (solo 401(k), SEP IRA, traditional IRA) offer tax deductions now while Roth plans (Roth IRA, Roth SEP and SIMPLE) offer the potential for tax-free withdrawals in retirement.

• Employer contributions. If you have employees or want to contribute as both employee and employer, then a solo 401(k)or SIMPLE IRA may be smart choices.

• Ease of use. If simplicity is key, a traditional or Roth IRA might be the most straightforward option.

Establishing a SEP IRA, SIMPLE IRA or other qualified retirement plan for your business may allow you to claim the Retirement Plans Startup Costs Tax Credit.

This credit helps offset startup costs for small businesses that set up retirement plans for their employees. It's worth up to $5,000 per year for three years.

Regardless of your retirement plan, a solid budget is the foundation of every retirement plan. Prioritize your future by paying yourself first, as they say, with a consistent line item in your budget for a retirement fund contribution. Intentionally carve out a piece of your monthly income or profit for retirement, and maintain that contribution as consistently as possible.

Along with contributing as much and as frequently as possible, you also should safeguard your retirement savings. As a self-employed person, you should consider having a handful of other protections and services in place to ensure you don't force an early withdrawal or otherwise damage your nest egg:

• Get business insurance. An accident in your workplace or a lawsuit could cause severe financial strain for your company (and potentially your savings). Life insurance and business liability insurance can help protect you from costly settlements that you would otherwise be financially responsible for.

• Consider a healthcare savings account (HSA). An HSA is a helpful tool if you have a high-deductible health plan. You might consider setting up an HSA to cover out-of-pocket healthcare expenses so you don't have to dip into your retirement savings if an unexpected health emergency arises.

Working with a financial advisor to walk through these important small business necessities—including a more in-depth look at retirement for self-employed individuals—can help you fully understand their impacts on your life, business and future. Contact a Thrivent financial advisor to get started.