Retirement plan options for the self-employed

Self-employment changes how you save for retirement.

Nearly 40% of Americans participate in the “gig economy.”¹ This workforce includes all kinds of self-employed consultants, freelancers and contractors, plus temporary and on-call workers.

Self-employment is an appealing career path for many people, but it doesn't come with a built-in retirement plan.

Retirement plans for the self-employed

“Self-employment is a double-edged sword,” says Joni Meilahn, vice president and product manager for U.S. Bancorp Investments. “With greater freedom and flexibility also comes greater responsibility. You don’t have the support of an employer-sponsored retirement plan to keep you on track. And, if your self-employment turns into a small business with employees, you become the source for not only your retirement plan but theirs as well.”

Retirement planning while being self-employed starts with a basic understanding of how much you can afford to save for retirement. Look at both your cash flow and your business expenses for the year to see how much you can comfortably put away each month.

Keep in mind the long-term nature of saving using IRS tax-qualified plans since there are penalties and taxes on withdrawals prior to age 59 ½. “Working with an accounting professional can really make a difference here,” says Meilahn. “That person can help you decide how best to report revenue and expenses in a way that’s both accurate and beneficial to your business.”

Finding the right tax-qualified retirement plan for you

After you have a sense of how much you can afford to put away for retirement, it’s time to find the specific, tax-qualified plan for you. Two tips before you get started:
 

1. Understand the IRS tax forms for your business

The structure of your business will determine which income tax forms you’ll need to file each year, and how your taxable income gets reported that provides the correct income upon which to base retirement plan contributions. Qualified retirement plan contributions provide valuable tax deductions that help reduce your overall taxes.

Are you a small business owner with employees? A contract worker out on your own? The answers determine how the IRS will tax your earnings. Check out these guidelines from the IRS to see which filing forms you’ll need, depending on your business structure.
 

2. Choose a tax-qualified retirement plan that fits your criteria

You’ve laid the groundwork by following the correct IRS reporting structure for your business. You know how much you’re prepared to contribute to your retirement. That means you’re ready to decide which tax-qualified plan to use. Each retirement plan comes with its own set of rules and contribution limits.

Each retirement plan comes with its own set of rules and contribution limits, so keep in mind that “best for you” really depends on your personal situation.

Self-employed retirement plan options

Following are five common tax-qualified retirement plan options for self-employed individuals and small business owners.

1. Traditional or Roth IRA

An individual retirement account (IRA) is a good option if you’re saving less than $7,000 for the year, or if you’re leaving a job to start a business. When you have no other qualified retirement plan, IRA contributions are fully tax deductible. Learn about the differences between a traditional IRA and a Roth IRA.

• Requirements: Very little setup; no special filing requirements. However, there is an income limit for opening and contributing to a Roth IRA.
• Current contribution cap: The 2024 tax year maximum is $7,000 ($8,000 if you’re 50 or older).

2. SEP IRA

Consider opening a Simplified Employee Pension (SEP) IRA if you have few or no employees and aren’t sure if you’ll be able to contribute every year. A SEP IRA follows the same rules as traditional IRAs; contributions are tax deductible, reducing your taxable income.

• Requirements: Limited paperwork; the IRS provides a model SEP plan document to adopt the plan; no annual reporting to the IRS needed. SEP contributions are employer contributions only, made to your account and to that of any eligible employee.
• Current contribution cap: Limited to the lesser of 25% of net taxable compensation/income or $69,000.

3. Solo 401(k)

A Solo 401(k) is essentially an individual 401(k) for solo business owners or self-employed individuals with no employees. This option, sometimes called a self-employed 401(k), can also include your spouse as an owner to maximize household contribution potential.

• Requirements: In addition to adopting a formal plan document, you’ll need to file paperwork with the IRS each year once you accumulate $250,000 in your account.
• Solo 401(k) highlight: Think of yourself as two different people — both your employer and your employee. You “both” have the option to make contributions, which allows for a much greater level of saving each year.
• Current contribution cap:
  • The employee deferral contribution is the lesser of $23,000 (plus an additional $7,500 if you’re 50 or older) or 100% of your earned income
  • The employer contribution limit is up to 25% of your earned income each year
  •  The combination of your employee and employer contributions together cannot exceed $69,000 (plus an additional $7,500 if you’re 50 or older)

4. SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is a good option if you’re self-employed or own a larger business that has up to 100 employees. In both instances, think of yourself as both the employer and employee for contributions to your own account.

• Requirements: The IRS provides model Simple IRA plan documents to adopt a plan, or you have an individually designed plan. Contributions are made up of employee deferral contributions and employer contributions. As the employer, you would need to make mandatory contributions to employee accounts who are eligible and making contributions to the SIMPLE IRA, including yourself.
• Current contribution cap for employee deferrals: Up to $16,000 (plus an additional $3,500 catch up contribution if you’re 50 or older).
• Note: If you also work for an employer in addition to your own business, the overall IRS contribution limits apply to all plans together.

5. Self-Employed Defined Benefit Plan

A Defined Benefit Plan is a good option if you’re self-employed or a small business owner, have consistent, high income and want to save a lot for retirement on an ongoing basis.

• Requirements: Defined Benefit Plans require a bit more planning, are more complex to set up, and are more expensive to maintain; however, the contributions can be far greater. You’ll need to be committed to this type of plan for at least three to five years or more.
• Contribution cap: Contributions to the plan are mandatory each year and are calculated based on the benefit you’ll receive at retirement, your age and expected investment returns. Depending upon your specific situation, contributions can be over $100,000 or more. Contributions are generally tax-deductible.

Choosing which plan is right for you and your business is a personal choice, but one you can ask for guidance from your accountant or financial professional. “When you understand which level best fits for you, and when it might be appropriate to move up the retirement plan pyramid, everything is a lot easier,” Meilahn says. 

When you’re self-employed, planning for retirement needs to be a self-driven pursuit. Whether you’re a new gig worker or have chosen a freelance or contracting gig as your second act in life, it pays to know what your options are so you can create a solid retirement fund that will help you build a brighter future.

Learn how we can help you plan for retirement.