5 Self-Employed Retirement Plans: 2023 Guide

5 Self Employed Retirement Plans: 2021 Guide; What retirement plan options are available to you if you are self-employed? Learn more about self employment retirement accounts and how to choose the right option.

LeeMarie KennedyUpdated August 18, 2023

Share this article:

Editor’s note: Lantern by SoFi seeks to provide content that is objective, independent and accurate. Writers are separate from our business operation and do not receive direct compensation from advertisers or partners. Read more about our Editorial Guidelines and How We Make Money.

For self-employed individuals, saving for retirement is just as essential as it is for people working for others, but the retirement plan options can often be different. While they’re busy reaping the benefits of being their own bosses (hello, always-approved vacation), self-employed workers don’t have access to some of the traditional retirement plans only available through employers. There are, however, five main types of self-employed retirement plans for freelancers, small business owners, and sole proprietors to choose from. Each one comes with its own set of pros, cons, contribution limits, and tax benefits. This 2023 guide to self-employed retirement plans helps break down how they all stack up.

1. Solo 401(k) Plan

A solo 401(k) plan is similar to a traditional employer-sponsored 401(k) plan, but it’s designed for one participant rather than a group of employees.

Pro of a Solo 401(k) Plan

Small business owners and sole proprietors wear both an employee hat and an employer hat, so they can enjoy higher contribution limits by contributing as both.

Con of a Solo 401(k) Plan

Self-employed people can’t contribute to a solo 401(k) plan if they have one or more employees, unless the employee is their own spouse. However, the spouse can contribute up to the standard contribution limit and receive employer contributions, as well.

Contribution Limits on a Solo 401(k) Plan

Total contributions can’t exceed $66,000 for 2023. One exception: Participants over 50 can add an additional $7,500 in catch-up contributions. Elective deferrals (employee contributions) can be up to 100% of the self-employed individual’s earned income, up to the annual limit of $22,500 for participants under 50, or up to $30,000 for participants over 50. In the participant’s capacity as the employer, he or she can also make an additional contribution of up to 25% of his or her earned income.

Tax Benefits of a Solo 401(k) Plan

Just like a traditional 401(k) plan, a solo 401(k) plan lets participants make pre-tax contributions, with distributions after age 59 ½ being taxed. And, since participants can contribute as both employee and employer, they also get a tax break on matching contributions.Recommended: How to Run a Successful Small Business

2. Traditional or Roth IRA

A traditional or Roth IRA, or Individual Retirement Account, is another retirement savings option for freelancers and sole proprietors. With traditional IRAs, participants contribute pre- or after-tax dollars until withdrawals are taxed as income after age 59 ½. With Roth IRAs, participants contribute after-tax dollars and can make penalty-free withdrawals when they retire.

Pros of Traditional or Roth IRAs

Traditional IRAs and Roth IRAs are a solid option for those who are just starting their small business. If they were previously enrolled in an employer-sponsored 401(k) plan that controlled their investment options, self-employed individuals can transfer those funds to a rollover IRA and start actively selecting their own investments.

Cons of Traditional or Roth IRAs

There are a few cons to using a traditional or Roth IRA when self-employed:

The participant pays taxes upfront with a Roth IRA, which can be an unexpected expense in the small business budget.
The maximum contribution limit in 2023 is low in comparison to other self-employed retirement plans.

Recommended: How Can You Get an IRA Loan?

Contribution Limits on a Traditional or Roth IRA

The max annual contribution to traditional IRAs and Roth IRAs in 2023 is either $6,500 if the participant is under 50, $7,500 for those over 50, or the total annual income — whichever is less.

Tax Benefits of a Traditional or Roth IRA

Traditional IRAs let participants contribute pre-tax dollars so they can save money in the short-term. Roth IRAs let them contribute after-tax dollars so they can withdraw the funds tax-free after the age of 59 ½.

3. SEP IRA

When self-employed individuals are thinking about retirement, using a Simplified Employee Pension (SEP) IRA can help them save money in the long-term and limit paperwork and administrative hassle in the short-term.

Pros of a SEP IRA

It’s the easiest option for small business owners and sole proprietors to establish and maintain. It offers a flexible variety of contribution types, there’s no annual funding requirement, and the participant can hire one or more employees while contributing to the plan.
No annual reporting to the IRS is required.
The contribution limits are in line with other plans.
Participants don’t have to contribute every year, and their contributions are immediately 100% vested.

Cons of a SEP IRA

Employers are required to contribute an equal percentage of salary for each participating employee, including themselves.
SEP IRAs, like all IRAs, don’t qualify for a loan feature in which the participant or business owner can borrow 50% or $50,000 of the vested balance (which is a possibility with qualified plans).

Recommended: Small Business Loan Options

Contribution Limits on a SEP IRA

For self-employed individuals, SEP IRA contributions cannot exceed the lesser of 25% of net earnings, not including contributions to themselves, or up to $66,000 for 2023.

Tax Benefits of a SEP IRA

Self-employed participants can deduct the lesser of their contributions of their employees’ SEP IRAs or 25% of their compensation on their tax return, but their distributions are taxed as income when they retire.

4. SIMPLE IRA

Another type of IRA for self-employed individuals is a Savings Incentive Match Plan for Employees (SIMPLE) IRA. It’s basically a hybrid combining a 401(k) plan and an IRA.

Pro of a SIMPLE IRA

The SIMPLE IRA includes all the same distribution, investment, and rollover rules as a SEP IRA or a traditional IRA but, unlike the SEP IRA, the contribution burden doesn’t rest solely with the employer.

Cons of a SIMPLE IRA

The early withdrawal penalties for a SIMPLE IRA are 25% for withdrawals within the plan’s first two years.
Employers are typically required to either make matching contributions of up to 3% of employee compensation, or to make fixed contributions of up to 2% for every eligible employee.

Contribution Limits on a SIMPLE IRA

SIMPLE IRA employee contributions cannot exceed $15,500 in 2023, with a catch-up contribution of $3,500 when permitted.

Tax Benefits of a SIMPLE IRA

SIMPLE IRA contributions are tax deductible, but retirement distributions are taxed. And contributions to employee accounts can be deducted as a business expense. Recommended: 5 Small Business Tax Tips for Business Owners

5. Defined Benefit Plan

Defined benefit plans are retirement accounts for self-employed individuals that offer significant tax savings and may be particularly beneficial to participants with high incomes.

Pros of a Defined Benefit Plan

Contribution limits are determined based on age, years in business, and income, so high earners who are nearing retirement can use a defined benefit plan to stockpile large sums of money. Additionally:

The benefits from a defined benefit plan don’t depend on asset returns.
They provide a predictable retirement benefit.
They offer a variety of vesting schedules.

Cons of a Defined Benefit Plan

There are a few cons to contributing to a defined benefit plan, including:

It’s the most costly type of retirement plan, with high initial fees and annual fees, which could increase if the self-employed individual hires employees.
It comes with complex administrative tasks.
It requires a commitment to fund a certain amount each year or the participant risks paying additional fees.
An excise tax applies if excess contributions are made to the plan or a minimum contribution requirement isn’t met.

Contribution Limits on a Defined Benefit Plan

Defined benefit plan contribution limits are based on the participant’s age, expected investment returns, and the benefit that will be received. In general, though, the contribution cannot exceed the lesser of 100% of the participant’s average compensation for the highest three consecutive years or $265,000 for 2023.

Tax Benefits of a Defined Benefit Plan

Defined benefit plan contributions are typically tax deductible, with distributions in retirement taxed as income.

Retirement Savings for Self-Employed Workers

To select the right self-employed retirement plan for your unique savings goals, consider factors such as:

Your age
How close you are to retirement
Your income
Your business structure
How much you want to contribute, either as employer or employee
Whether you have employees who also need retirement plans

Weighing the pros and cons, contribution limits, and tax advantages can help you better understand what might work best for your business structure and future plans. Recommended: Loans for Retirees

The Takeaway

Retirement plans for self-employed individuals are different from traditional employer-sponsored retirement savings plans. The five main types of self-employed retirement plans are solo 401(k)s, traditional and Roth IRAs, Simplified Employee Pension (SEP) IRAs, Savings Incentive Match Plan for Employees (SIMPLE) IRAs, and defined benefit plans. Being able to compare and contrast your options can help you make the best choice, whether you’re looking at retirement savings plans or small business loans. With Lantern by SoFi, you can receive a small business loan offer from one of our leading lenders by filling out one simple form, all with no obligation to you.

LCSB0723011

About the Author

LeeMarie Kennedy

LeeMarie Kennedy is a Boston-based copywriter and content creator with over a decade of experience writing for a variety of publishers, institutions, and corporations. She has spent the last few years focusing on writing for financial services, technology, HR and TA, and health & wellness sectors. LeeMarie has a BA in Journalism from Quinnipiac University and a MS in Organizational Communication from Northeastern University and was an original contributor to The Daily, SoFi's newsletter.

Share this article: