Retirement Saving Options for Self Employed Individuals

​Self-employed individuals don’t have the luxury of employer retirement contributions, so they must take proactive steps to secure their financial future. Without a structured retirement plan, many face financial insecurity in retirement. Therefore, selecting the right savings plan is one of the first steps in ensuring financial security after work.

There are a number of retirement savings options that self-employed people can choose from. These plans have their respective advantages and disadvantages, so it depends on the individual to select which one works best for them. Some of the most common personal retirement savings options are the simplified employee pension (SEP) IRA, the savings incentive match plan for employees (SIMPLE IRA), solo 401(K) plan, taxable investment accounts, and traditional or Roth IRA.

A SEP IRA is a tax-deferred plan that allows self-employed individuals to contribute up to 25 percent of their net income. It must not exceed $66,000 every year. This retirement savings option is such that there are no mandatory contributions, and it allows the individual to make adjustments to their contributions based on changes in their income. Contributions to a SEP IRA are tax-deductible and reduce taxable income.

The SIMPLE IRA requires contributions not above the sum of $15,500 annually or $19,000 for individuals above the age of 50, making it suitable for self-employed individuals or small businesses. Although SIMPLE IRA contributions are lower compared to Solo 401k(K) and SEP IRA, it is quite easy to set up and administer. Contributions reduce taxable income, and the funds grow tax-deferred.

A Solo 401(K)is a retirement plan that caters to the needs of self-employed individuals or owners of small businesses that have no employees except a spouse. This plan comes with a high contribution limit, which ensures that both the employer and employee are able to make contributions. In 2025, the 401(K) contribution limit has been increased to $23,500 for individuals from $23,000, and it has been increased to $31,000 for people above the age of 50 from $30,500. Making contributions to the solo 401(K) plan helps the individual to reduce taxable income.

Although it is not a dedicated retirement plan, taxable investment accounts offer self-employed individuals a flexible way to grow their wealth. These accounts allow investments in stocks, bonds, and mutual funds without contribution limits, making them a valuable option for those looking to supplement their retirement savings. One of their biggest advantages is flexibility. They do not come with penalties for early withdrawals, giving investors access to funds when needed. They also serve as a great diversification tool, working alongside traditional retirement accounts to create a well-rounded investment portfolio. However, it’s important to consider tax implications, as investment gains are subject to capital gains tax.

The Traditional IRA allows tax-deductible contributions, reducing taxable income in the present, but withdrawals are taxed during retirement. In contrast, the Roth IRA requires after-tax contributions but offers tax-free withdrawals in retirement, making it a strong long-term tax strategy. Both IRAs have contribution limits of $6,500 per year ($7,500 for individuals over 50). Roth IRA eligibility depends on income, while tax deductions for Traditional IRAs may also be income-limited. The best choice depends on your financial goals, tax situation, and need for future flexibility.

Gerard Dougherty

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