When you open a business, you accept many responsibilities outside of creating the product or service you sell. You must handle accounting, insurance, customer service, and your own employment benefits. One of the most important benefits you can provide for yourself is a retirement savings account.
Retirement accounts generally offer advantages which allow you to save while reducing your tax burden. However, the type of plan you choose can have a significant impact on the amount you can save, the tax benefits you receive, and the amount of work you add to your plate.
Key Considerations When Choosing a Retirement Account
There are several types of retirement plans that you can establish as a self-employed individual. As you weigh the options, consider the following factors.
- The amount you can comfortably save. Different plans have different contribution limits which determine the amount you can set aside each year.
- Your current number of employees and plans to add additional staff in the future. Some plans are only available to an individual, while others can accommodate a small team of employees.
- Type of contributions allowed. Plans may allow contributions as an individual, on behalf of the business, or both.
- Tax treatment of contributions and distributions. Traditional retirement plans offer immediate tax benefits while some plans allow Roth contributions, which provide delayed retirement benefits.
- Accessibility of funds prior to retirement. Certain plans make funds available for withdrawal at any time while others have more stringent withdrawal requirements.
- Administrative burden. Certain plans require annual reporting, while others do not.
Keep these factors in mind as you review the types of accounts available to you. They will help guide you to choose the plan that best matches your goals and situation.
Traditional and Roth IRAs Are Popular Choices for the Self-Employed
The simplest option to save for retirement is an Individual Retirement Account [IRA]. These accounts have the benefit of simplicity, flexibility, and ease of access. However, their low contribution limits and limited tax benefits present a challenge for high earners who want to maximize their savings.
Availability
This type of account is available to everyone with earned income, regardless of how they are employed or how many people work for them. Additionally, it is usually very simple to open, only requiring a short application.
Contributions
Both Traditional and Roth IRAs accept employee contributions only – meaning you contribute from your own salary or self-employment income, but not on behalf of the business you own. For this reason, the tax benefits associated with this type of account are realized on your personal income taxes rather than the taxes of the business.
While there are many benefits to a Traditional or Roth IRA, there is one notable downside – the relatively low contribution limit. You can contribute 100% of your earned income up to $7,000 for 2025. If you are over 50 years old, you can contribute an additional $1,000 as a catch-up contribution.
Additional caveats apply to both Traditional and Roth IRA contributions. First, you can only make a full contribution to a Roth IRA if your income is under $150,000 if you file as single or $236,000 if you are married filing jointly. Second, you can only deduct contributions to a Traditional IRA if your income is under:
- $79,000 if you are covered by a workplace retirement account.
- $126,000 if you are married filing jointly and covered by a workplace retirement account.
- $236,000 if you are married filing jointly and not covered by a workplace retirement account, but your spouse is.
Finally, if both you and your spouse are not covered by a workplace retirement account, you are not subject to an income limit for tax deductibility.
Roth Availability
IRAs are available in both Traditional and Roth. Traditional IRAs provide an immediate tax benefit by allowing you to deduct contributions from your income tax if you meet the qualifications for a deductible contribution. On the other hand, Roth IRAs provide delayed tax benefits by allowing you to make tax-free withdrawals in retirement if you meet the criteria for a qualified withdrawal.
Early Distributions
Early withdrawals are often an important consideration for self-employed individuals since income can vary drastically from year to year. Fortunately, IRAs allow withdrawals at any time for any reason, which allows you to access the funds early if needed. However, you may owe a 10% early withdrawal penalty for distributions before age 59 ½.
Administrative Burden
Since IRAs are not technically a business retirement plan, they are not subject to many of the reporting requirements associated with traditional corporate retirement accounts. In fact, they are among the simplest accounts to maintain because they do not require you to file any paperwork as a business owner.
SEP IRAs for Self-Employed Individuals
SEP IRAs are another type of IRA that was designed specifically for self-employed individuals. Like Traditional and Roth IRAs, SEP plans excel in simplicity. They also provide the additional benefit of higher contribution limits and the ability to contribute to your retirement on behalf of the business you own. However, they have unique constraints if you have employees which can make this plan expensive to maintain.
Availability
SEP IRAs are available for self-employed individuals and small business owners. However, most SEP IRA plans require you to contribute the same percentage of compensation for each employee – meaning you can’t contribute a higher percentage of your own salary than you contribute for your staff. This constraint makes SEP IRAs expensive if you have employees and want to contribute a high percentage of your income to your own retirement plan.
Contributions
Unlike Traditional or Roth IRAs, this type of account only accepts employer contributions – meaning you contribute to the account on behalf of the business rather than from your salary. Therefore, any upfront tax benefit you receive will be a deduction for the business rather than your personal income tax.
One of the most important benefits of a SEP IRA is the very high contribution limit compared to other types of plans. You can contribute 25% of compensation up to $70,000 for 2025 – or 20% of net self-employment income, depending on the structure of your business. This high contribution limit makes SEP IRAs a popular choice for self-employed individuals with high income.
Additionally, you can contribute to both a SEP IRA as a business and a Traditional or Roth IRA as an individual in the same year. This allows you to save even more for your retirement than either plan alone.
Roth Availability
For much of their history, SEP IRAs were only available as pre-tax accounts, otherwise known as Traditional. However, the SECURE Act 2.0 revised this rule and allowed for the establishment of Roth SEP IRAs.
Early Withdrawals
Withdrawal rules for SEP IRAs are virtually the same as those that apply to Traditional and Roth IRAs. They allow you to withdraw funds at any time for any reason, but you may owe a 10% penalty on early distributions.
Administrative Burden
SEP IRAs are generally very simple to maintain and have limited reporting requirements. In most cases, you are not required to file annual reports with the federal government. However, you may have internal responsibilities to manage if you have employees eligible to participate in the plan, such as monitoring plan eligibility requirements and keeping track of contribution amounts.
SIMPLE IRAs for Self-Employed Individuals
Another type of retirement plan available to self-employed people and small business owners is the SIMPLE IRA. This plan provides benefits for both the owner and staff, so it is popular with businesses that have employees. Unfortunately, it is slightly more complex to manage than a Traditional or Roth IRA.
Availability
SIMPLE IRAs are an option for companies with fewer than 100 employees. These plans are especially well suited to small businesses or individuals who plan to hire employees in the future.
Contributions
SIMPLE IRAs allow both employee and employer contributions – meaning you can contribute from your own salary and on behalf of the business you own. This structure allows you to realize tax benefits on both your personal and business tax returns.
In 2025, you can contribute up to $16,500 as an individual. If you are over 50 years old, you can also contribute an additional $3,500 as a catch-up contribution. A higher catch-up contribution amount of $5,250 applies if you are between the ages of 60 and 63.
In addition to salary deferrals, you have two options for making employer contributions to a SIMPLE IRA. You can choose to match employee contributions up to 3% of compensation or make a nonelective contribution of 2% of compensation. If you choose the nonelective option, you must contribute to each employee’s account regardless of whether they contribute to the plan. The employer contribution rules apply to you as the owner of the business and any staff that you maintain who meet the eligibility criteria of the plan.
Roth Availability
Following a legal change in the SECURE Act 2.0, SIMPLE IRAs are now available in Roth. This new provision allows you to earmark your contributions as Roth and receive a delayed tax benefit.
Early Withdrawals
Like other types of IRAs, SIMPLE IRAs allow withdrawals at any time for any reason. However, the early withdrawal penalty is increased to 25% if you take a distribution within the first two years that the account has been established.
Administrative Burden
SIMPLE IRAs require you to adopt a plan document that outlines the terms of the plan. Many companies that you could choose to open a plan with will provide a plan document for your use. You must also provide key disclosures to employees as well as notifications if you change the plan’s structure. However, these plans do not require annual financial reports to be sent to the federal government.
Individual 401(k) Plans for Self-Employed People
Since 401(k)s are usually mentioned in the context of large corporations, you may be surprised to learn that these plans are also an option for self-employed people. If you don’t have any employees, you can open an Individual 401(k), also known as a Solo 401(k).
Availability
An Individual 401(k) is not designed for companies with employees. Instead, it covers only the business owner and their spouse. If you plan to expand your business in the future to include employees, you will need to convert the plan to a different type of 401(k) or terminate it.
Contributions
Like SIMPLE IRAs, an Individual 401(k) allows for both contributions from your salary and on behalf of the business you own. This structure allows you to realize tax benefits on your personal and business tax returns.
Salary deferral limits in 2025 are 100% of your compensation up to $23,500 – also known as “elective deferrals.” This limit is increased by $7,500 for people over 50 years old or $11,250 for those between ages 60 and 63. You can also add contributions on behalf of the business up to a total of $70,000 including your salary deferrals.
Roth Availability
You can choose to designate your contributions as Roth – making the Individual 401(k) an extremely versatile investment option. Unlike Roth IRAs, there are no income limits associated with Roth 401(k) contributions.
Early Withdrawals
Withdrawal rules are one possible downside of an Individual 401(k). Like corporate-sponsored 401(k) plans, you can only withdraw funds in certain circumstances like reaching age 59 ½ or terminating the plan. However, you may be able to take a loan from the plan if you include this provision in the plan document.
Administrative Burden
Another hurdle that impacts owners of Individual 401(k)s is the added administrative burden. These plans require you to adopt a plan document and to file form 5500-EZ each year if your plan has over $250,000 in assets.
Which Plan Is Right for You?
Even with all this information, the decision of which plan to establish is a difficult one. Each option offers different tax benefits, contribution limits, and administrative responsibilities. Fortunately, you don’t have to make the choice on your own.
An experienced financial advisor can help you weigh the pros and cons of each type of retirement plan. They will also work with you to understand your personal retirement goals and the benefits you’d like to offer to employees if you have them. With this information in mind, your advisor can help you make the choice that maximizes your savings potential and minimizes your tax burden.
Plan For a Successful Retirement with DreamWork Financial Group
At DreamWork Financial Group, we can help you determine the right type of retirement savings account for your situation. Our team will meet with you to establish your personal and business goals as well as understand your tax situation. We will then help you choose a plan to achieve your goals while balancing administrative work.
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