Self-employed professionals have access to a wide range of IRS-approved retirement plans. These options vary in how much you can contribute, when taxes are paid, and how complex they are to maintain. The primary choices include the Solo 401(k), SEP-IRA, SIMPLE IRA, defined benefit pension plan, and individual Traditional and Roth IRAs.
Each plan serves a different income level and business structure, but all are designed to help self-employed individuals convert business profits into long-term, tax-advantaged retirement wealth.
Solo (One-Participant) 401(k)
A Solo 401(k) is designed for owner-only businesses and offers the highest savings potential for most self-employed individuals. It allows contributions in both an employee and employer capacity, significantly increasing how much income can be sheltered from taxes.
How contributions work
You can defer up to the annual employee limit (indexed for inflation), with an additional catch-up contribution available for those age 50 or older. On top of this, the business can contribute up to 25 percent of compensation (approximately 20 percent of net self-employment income after the self-employment tax adjustment), subject to the IRS annual combined maximum.
Tax treatment and Roth option
Employee and employer contributions are generally deductible and grow tax deferred. Many Solo 401(k) plans also allow Roth salary deferrals, enabling a portion of savings to grow tax free.
Who it fits
Solo 401(k)s are available only to businesses with no full-time employees other than a spouse. They are ideal for high-income solopreneurs who want to save aggressively and are comfortable maintaining a formal plan and filing Form 5500-EZ once plan assets exceed IRS thresholds.
SEP-IRA
A SEP-IRA is one of the simplest ways for a self-employed individual to make large deductible retirement contributions. It offers flexibility, making it attractive for business owners with fluctuating income.
How contributions work
The business can contribute up to 25 percent of compensation (about 20 percent of net self-employment income), up to the IRS annual limit. There are no employee salary deferrals or catch-up contributions.
Tax treatment
SEP-IRA contributions are traditionally made with pre-tax dollars and grow tax deferred. Recent law changes allow for Roth SEP contributions, though availability depends on IRS guidance and plan provider support.
Who it fits
SEP-IRAs can be used by businesses of any size. However, if you have eligible employees, you must contribute the same percentage for them as you do for yourself. As a result, SEP-IRAs work best for owners with no employees or only a small number of key staff.
SIMPLE IRA
A SIMPLE IRA is a small-business retirement plan that combines ease of administration with mandatory employer contributions.
How contributions work
Employees can defer up to the annual SIMPLE IRA limit, with additional catch-up contributions available for those age 50 or older. Employers must either match employee contributions up to 3 percent of compensation or make a 2 percent non-elective contribution for all eligible employees.
Tax treatment
Contributions generally grow tax deferred, and withdrawals are taxed as ordinary income. Roth SIMPLE IRAs are now permitted under recent legislation, though many plan providers have not yet implemented them.
Who it fits
SIMPLE IRAs are available to businesses with 100 or fewer employees that do not maintain another retirement plan. They are well suited for small firms seeking a low-cost, straightforward option and that are comfortable with required annual employer contributions.
Defined Benefit (Pension) Plan
A defined benefit plan is the most powerful retirement option available to self-employed individuals with very high income. Rather than limiting annual contributions, the plan is designed to provide a specific retirement benefit.
How contributions work
An actuary determines the annual contribution required to fund the promised benefit. The IRS sets a maximum annual benefit (indexed for inflation), which can result in very large deductible contributions, often six figures, for older, high-earning business owners.
Tax treatment
Contributions are deductible to the business and grow tax deferred. Benefits received in retirement are taxed as ordinary income.
Who it fits
Defined benefit plans are best suited for profitable, established businesses with stable cash flow, often owned by individuals over age 50 who want to accelerate retirement savings. Due to their cost and complexity, these plans are appropriate only when income is strong and predictable.
Traditional IRA
A Traditional IRA is the most basic retirement account available and can serve as a primary savings vehicle or a supplement to a business retirement plan.
How contributions work
Annual contribution limits are modest and indexed for inflation, with additional catch-up contributions available for those age 50 or older. Contributions cannot exceed earned income.
Tax treatment
Contributions may be deductible depending on income and whether the taxpayer or spouse participates in another retirement plan. Earnings grow tax deferred, and withdrawals are taxed in retirement.
Who it fits
Traditional IRAs are ideal for lower- and moderate-income earners or anyone seeking a simple, low-maintenance way to save for retirement.
Roth IRA
A Roth IRA provides tax-free retirement income in exchange for giving up an upfront tax deduction.
How contributions work
Contribution limits are the same as for Traditional IRAs and are indexed annually for inflation. Contributions are made with after-tax dollars.
Tax treatment
Qualified withdrawals, including investment growth, are completely tax free. Roth IRAs are not subject to required minimum distributions, making them valuable for estate and legacy planning.
Who it fits
Eligibility is subject to income limits that phase out at higher earnings levels. Roth IRAs are particularly attractive for younger savers, moderate-income earners, and anyone seeking tax diversification in retirement.
Choosing the Right Plan
The best retirement plan for a self-employed individual depends on income, business structure, and savings goals:
- High-income, owner-only businesses often benefit most from a Solo 401(k) or a defined benefit plan
- Owners with variable profits or a small number of employees frequently choose a SEP-IRA
- Small businesses with staff and modest profits often rely on a SIMPLE IRA
- Lower-income individuals or those seeking simplicity may use Traditional or Roth IRAs
Each of these plans is governed by IRS rules outlined in Publication 560 and related guidance. When used correctly, they allow self-employed professionals to transform today’s business income into secure, tax-efficient retirement wealth.