Retirement Planning for Self-Employed

Self-employed people have access to retirement plans that are actually more generous than what most W-2 employees get. The problem is that almost nobody uses them to their full potential.

The Plans Worth Comparing

Four retirement plans cover the vast majority of self-employed situations. Each has different contribution limits, administrative requirements, and tax treatment. The right one depends on how much you earn, how much you want to set aside, and whether you have employees.

SEP IRA

The simplest option. You can contribute up to 25% of net self-employment income (after the SE tax deduction), capped at $70,000 for 2025 and $70,000 for 2026. No employee contributions, no Roth option, no loans. You open it at any brokerage, and contributions are due by your tax filing deadline including extensions. If you have employees, you must contribute the same percentage for them — which is why solo operators love it and employers with staff often don’t.

For a deeper comparison of IRA types, see our Traditional IRA vs. Roth IRA vs. SEP IRA guide.

Solo 401(k)

More paperwork, more flexibility. You can defer up to $23,500 as an employee in 2025 (plus $7,500 catch-up if you’re 50+), and add an employer contribution of up to 25% of compensation on top of that. Total limit: $70,000 in 2025 ($77,500 with catch-up). The Solo 401(k) also allows Roth deferrals and plan loans up to $50,000. It’s only available to businesses with no common-law employees other than a spouse.

SIMPLE IRA

Designed for small businesses with employees. Employee deferrals up to $16,500 in 2025 ($3,500 catch-up over 50). Employer must either match up to 3% of compensation or contribute a flat 2% for all eligible employees. Lower limits than a SEP or Solo 401(k), but easier to administer than a full 401(k) plan.

Defined Benefit Plan

The heavy hitter. Contributions are based on an actuarial calculation, and annual deductible amounts can exceed $200,000 depending on age and income. If you’re over 45, earn $300,000+, and want to shelter a large portion from taxes, a defined benefit plan paired with a 401(k) is worth the actuarial fees. The catch: you commit to funding it every year.

Tax Savings at Different Income Levels

A freelancer earning $80,000 net who maxes out a Solo 401(k) employee deferral of $23,500 saves roughly $7,000 in combined federal and state tax (assuming a 30% effective rate). That same person contributing to a SEP IRA at 25% of adjusted net — about $14,800 — saves around $4,400.

At $250,000 net, the math shifts dramatically. A Solo 401(k) with both employee and employer contributions can shelter over $60,000. A defined benefit plan could push that to $150,000+. The tax savings at the 37% federal bracket alone make the administrative costs trivial.

Key Takeaway

The Solo 401(k) beats the SEP IRA for most self-employed people earning under $300,000 because of the employee deferral component. Above $300,000, adding a defined benefit plan becomes the most aggressive legal tax shelter available.

Why Most Self-Employed People Under-Save

Income is unpredictable. That’s the most common reason — and it’s also an excuse. You don’t have to max out a plan to benefit from it. Contributing $500 a month to a Solo 401(k) puts $6,000 a year to work and saves you $1,800+ in taxes.

The real issue is that nobody withholds retirement contributions from your freelance check. There’s no HR department auto-enrolling you at 6%. You have to do it yourself, and most people keep putting it off until “next year.” Ten years of “next year” is how you end up at 50 with $40,000 in retirement savings.

The Backdoor Roth Strategy

If your income is too high for direct Roth IRA contributions (above $165,000 single / $246,000 married in 2025), the backdoor Roth lets you get money into a Roth anyway. You contribute to a traditional IRA (nondeductible), then convert it to a Roth. The conversion is tax-free as long as you don’t have other pre-tax IRA balances — that’s the pro rata rule, and it trips up a lot of people who have SEP IRAs.

One workaround: roll your SEP IRA into a Solo 401(k) to zero out the pre-tax IRA balance, then do the backdoor Roth cleanly. This is one of those planning moves that pays for the cost of a tax strategy consultation many times over.

How to Choose the Right Plan

If you’re solo with no employees and earn under $250,000, the Solo 401(k) is almost always the best fit. If you don’t want to deal with any paperwork, the SEP IRA works fine — you just can’t defer as much at lower income levels.

Have employees? The SIMPLE IRA keeps things manageable. Earning $300,000+ and want to save aggressively? Talk to an actuary about a defined benefit plan. The annual cost of maintaining one runs $1,500 to $3,000, which is a rounding error against the tax savings.

The worst plan is no plan. Every year you skip costs you compound growth you don’t get back.

Frequently Asked Questions

What retirement plan lets me save the most?

A defined benefit or cash balance plan offers the highest contribution limits — potentially $200,000 to $300,000+ per year depending on your age and income. For most self-employed individuals, a Solo 401(k) is the best balance of high limits ($70,000 total for 2025 if under 50) and low administrative cost. A SEP IRA is simpler but only allows employer contributions up to 25% of net earnings.

Can I have both a Solo 401(k) and a SEP IRA?

Technically yes, but there’s usually no reason to. Both share the same overall annual contribution ceiling ($70,000 for 2025 under age 50), so having both doesn’t increase your total allowable contributions. Most self-employed individuals choose one or the other. The Solo 401(k) is more flexible because it allows both employee deferrals and employer contributions, plus a Roth option.

What is a cash balance plan and who should consider one?

A cash balance plan is a type of defined benefit plan that looks like a 401(k) on the outside — each participant has a notional account balance — but it follows defined benefit rules, allowing much larger contributions. It works best for self-employed professionals over 40 with consistent high income ($250K+) and few or no employees. The setup and actuarial fees run $2,000 to $4,000 annually, but the tax savings typically dwarf the costs.

Can I contribute to a retirement plan if I had a loss this year?

Not to a plan based on self-employment income. Contributions to a SEP IRA, Solo 401(k), or defined benefit plan are calculated on net self-employment earnings. If you had a net loss, there’s no earned income to base contributions on. However, if you have W-2 income from another job, you can still contribute to that employer’s plan or a traditional/Roth IRA based on the W-2 income.

When is the deadline to set up and fund a Solo 401(k)?

The plan must be established (paperwork filed with the provider) by December 31 of the tax year. However, you have until your tax filing deadline — including extensions — to make employer contributions. Employee deferrals must be made by December 31. So if you’re thinking about it in October, you still have time to set up the plan and make the employee deferral. Miss December 31 and you’re limited to a SEP IRA, which can be established and funded up to the extended filing deadline.

Work With The Reed Corporation

Need help choosing a retirement plan or building a tax strategy around your self-employment income? Our NYC CPA team provides tax strategy consulting for freelancers and business owners.

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