Updated: May 19, 2024

Retirement Plan Options for the Self-Employed

Learn what are the most commonly used retirement plans for the self-employed and what are the alternative options when you reach the limits.
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Retirement options for people who own their own business are different from the retirement options available to individuals who work for a company they do not own.

The majority of employees of companies in the United States participate in company-sponsored 401k retirement plans, and while that particular retirement plan is not available to self-employed individuals, there are a variety of tax-favored methods the self-employed can use to start saving for retirement.

The most commonly used retirement plans for the self-employed are:

  • Solo 401k 
  • Simple IRA Plan
  • Simplified Employee Pension IRA
  • Defined Benefit Plan

Here is what you need to know about each of the self-employed retirement plan options:

Solo 401k

As the name suggests, the Solo 401k is the self-employed retirement option most similar to the company-sponsored 401k plans.

The Solo 401k is the best option for small business owners that wish to contribute more than a SIMPLE or SEP IRA allows per year. It has higher contribution limits than some other options for self-employed retirement plans.

To be eligible for the Solo 401k retirement plan, your business must only consist of you (the owner), your spouse, or part-time employees. 

Self-employed businesses include sole proprietorships, closely held family businesses, LLC’s, partnerships and corporations.

You can make annual contributions of both salary deferral and profit-sharing contributions -- this means you can save up to $57,000 in 2020 ($63,500 if you are more than 50 years old), tax-deferred.

Contributions can be up to $57,000 in 2020 and $58,000 for tax year 2021 (including an additional catch-up contribution of $6,500 if you are age 50 or older). The maximum amount you can contribute depends on your income or profit in any given year.

Simple (Savings Incentive Match Plan for Employees) IRA Plan

For business owners with 100 employees or less, including the self-employed, earning at least $5,000 through payroll, the Simple IRA Plan is a retirement option that is one of the easiest to set up.

Employers are required to match the employee’s contribution dollar-for-dollar up to 3% of employees’ pay as a matching contribution to the retirement plan, or 2% non-elective.

An employee can contribute up to $13,500 per year in 2020 and 2021 to their Simple IRA Plan. In addition, participants age 50 and older may be able to increase this maximum to $16,500 for both 2020 and 2021.

Note: You may not exceed your net earnings from self-employment from the business sponsoring the SIMPLE IRA plan.

If the employee also contributes to other employer retirement plans in the same year, the total contributions an employee may make in 2020 and 2021 are $19,500.

Some Simple IRA Plans allow individuals who are 50 years or older to make catch-up contributions to their plan of $3,000.

Simplified Employee Pension (SEP) IRA

For self-employed business owners who want to contribute more to their retirement plan than the SIMPLE or other IRAs allow, the Simplified Employee Pension (SEP) IRA is a good option.

SEP IRAs can be set up as easily as the Simple IRA, but instead of employees contributing to the retirement plan with an employer match, under Simplified Employee Pension plans, the employer makes the entire retirement contribution.

The contribution limits for 2020 are 25% of the employees’ compensation or $57,000 ($58,000 for 2021).

An eligible employee is an individual (including a self-employed individual) who meets all the following requirements:

  • Has reached age 21
  • Has worked for the employer in at least 3 of the last 5 years
  • Received at least $600 in compensation from the employer during the year (for 2017, 2018, 2019, and 2020)

Defined Benefit Plan

For financially successful self-employed individuals, the Defined Benefit Plan may be the best option for retirement savings.

The business can contribute a maximum of $230,000 annually, but an actuary must be used to determine the exact amount an employer can contribute, adding to the complexity and expense of using the retirement plan. 

The amount the employer contributes must remain consistent year after year, which makes the Defined Benefit Plan the least flexible of the self-employment retirement options.

If a business has fluctuating income, the other self-employment retirement options (Simple IRA, SEP Ira, and Solo 401k) all allow employers to reduce the amount of money contributed.

Under the Defined Benefit Plan, a specific amount of money will be received by the retiree each month.

The plan may specify the dollar amount or calculate the amount based on a formula using the number of years in service and a percentage of salary earned.

Retirement Fund Alternatives 

The retirement plan you choose will depend on the amount of income your business earns per year, the amount you want to contribute annually, and the number of employees in your business.

If you’ve reached these limits, it doesn’t mean you should stop saving. On the contrary, it’s an opportunity to build up other savings areas that you may not have paid much attention to.

Take a close look at your financial plan and the retirement investment options you'll need to retire in the manner you’ve anticipated.

Talk to your financial advisor about various strategies to make the most of your savings to achieve your specific goals.

Here are some options to consider for retirement investment options once you’ve reached your yearly tax-deductible retirement savings limits:

Consider Certificates of Deposit

A CD is a low-risk, fixed interest rate bank deposit account that increases the interest rate the longer the term of the CD.

If you are looking for a dependable return on your money, but don’t need to tap into your money for a length of time, a CD may be a good savings option.

As with any investment, it’s key to decide if a CD fits your particular needs.

A CD can be a great way to fund short-term needs, such as a down payment on a house or purchasing a new car. CDs can also be used to build funds for longer-term goals like retirement or college tuition.

Before you lock your money into a CD for any period of time, you’ll want to consider the fees and penalties associated with liquidating the CD prior to the maturity date.

If your purpose is to save for a short-term goal, then a 12-month CD will most likely earn more interest than simply sitting in a checking or savings account, but you can quickly cash it in when you need it without penalties.

For longer-term goals like saving for a big vacation or making future home renovations, you may want to put your money in 2-year or 5-year CD to maximize your interest and grow your savings.

Finally, as part of your retirement savings strategy, you may consider a longer term CD such as a 7-year CD or a 10-year IRA retirement CD. These offer the highest interest rates.

One way to combat interest rate risk is to consider laddering CDs. For example, to build a five-year ladder, you would buy a one-year CD, two-year CD, three-year CD, and so on until you have a total of five CDs in your basket.

Each year, when one of your CDs matures, you reinvest it at the end of your ladder. A laddering strategy can help diversify your holdings and increase current income.

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Contribute to a Nondeductible IRA

Unlike Roth or 401(k), a nondeductible IRA does not have any earnings limits.

You can make an after-tax $6,000 contribution and then be taxed what you earn in investment gains.

Unlike other retirement accounts, you can take money out without penalties. However, you will be taxed at ordinary rates as high as 35 percent.

A taxable account is also a good retirement investment option to diversify your investments using exchange-traded funds.

These invest in commodities which generate few capital gains -- meaning lower taxes when you eventually sell your investments.

Put money away in a 529 plan

You can save after-tax dollars for your kids or nephews, nieces or grandchildren or friends’ kids in a 529 plan.

The funds can be used for tuition for both undergraduate and graduate school, books and other qualified educational expenses.

There are many financial vehicles to park your investments after you’ve maximized your retirement savings, so carefully consider what type of investment makes the most sense for you and your lifestyle.

Remember, this is a great situation to be in, and if you've already maxed out your retirement contributions for the year, you are certainly on the right track!