Retirement Options for the self employed

by NEIRG Research and Analysis Team | Mar 31, 2017

With an ever growing startup culture and an expanding freelance market self-employment is increasing.

A recent MSN Money article estimated the millennial self-employment rate is approximately 30%. Being self-employed brings big benefits, including greater flexibility and better work-life balance, however, there are some drawbacks. Extra taxes is one example: Self-employed people have to pay more in Social Security and Medicare taxes than employees do, in addition to their standard income tax, which is not withheld from their paychecks. The lack of formal employee benefits, such as retirement plans, is another example. There are some retirement plans for self-employed workers that can help by reducing your taxable income while saving money for retirement. Which plan is best for you depends on your personal situation, including your income, age, and when you plan to retire.

Solo 401(k)


  • High contribution limits. Because you are both the employer and the employee, your contributions limits are higher in a Solo 401(k) plan than most other retirement plans. As an employee, you can contribute up to $18,000 for the year (plus up to $6,000 in catch-up contributions if you are 50 years or older). Your contributions are made with pre-tax dollars. As an employer, you could contribute up to 25% of your business’s earnings (or 20% if you are a single-member LLC or sole proprietor) on top of the employee contribution until you reach a combined total amount of $53,000 (or $59,000 factoring in catch-up contributions). Plus, employer contributions may be deductible as a business expense.
  • Contribute double. You could also potentially hire your spouse and let him or her participate in the plan. Your spouse can contribute up to $18,000, and you could put in the typical employer contribution up to a total amount of $53,000. Your spouse can also make catch-up contributions, if 50 years or older.
  • Tax deferred growth.  Your contributions are pre-tax, while earnings (through income, dividends and appreciation) grow tax-free. You’ll ultimately pay tax on withdrawals but this benefit enables the possibility for greater growth over time.
  • Flexibility. You can put up to the limit, or as little as you want each year.


  • Reporting. You are required to file a report with the IRS annually if you have at $250,000 or more in your plan.
  • Not available to everyone. You can only use a Solo 401(k) if you have no employees aside from your spouse.

Consensus: These plans work well for self-employed people with no employees (other than a spouse) because of the high contribution limits, tax-deferred growth and flexibility in contribution amounts.

Simplified Employee Pension (SEP)


  • Easy to start and low maintenance.  Complete basic forms to set up, and no initial or yearly reporting to the IRS is required.
  • Contribution limits. As an employee you can contribute up to 25% of your W-2 income, or about 20% of your Schedule C net income, up to $53,000 for 2016.
  • Tax-deferral. You can benefit from tax-deferred contributions until you begin withdrawals. Generally, you could start withdrawing money at age 59½. You don’t have to start withdrawals until age 70½.


  • Only employer contributions. If you have employees, they must be included in the retirement plan. You are not allowed to contribute a higher percentage to your own account than you do to your employees.

Consensus: Self-employed people who have few or no employees and are looking for flexibility in how much they save.

Savings Incentive Match Plan for Employees (SIMPLE IRA)


  • Easy to start and low maintenance.   It only takes some basic paperwork to start an account. Basic annual maintenance paperwork.
  • Contribution limits. You can contribute, up to $12,500, into a SIMPLE IRA each year (plus an additional $3,000 if you are age 50+).
  • Deductible expenses. Employer contributions may be deductible as a business expense.


  • Contribution limits. The limit is much lower than for a SEP IRA and Solo 401(k)
  • Matching contributions. You have to two options: You may match employee contributions of 1% to 3% of total pay, as detail in the initial plan document, or make a fixed 2% contribution to employee accounts, even if an employee is not actively contributing.
  • Rules. You cannot transfer your SIMPLE IRA into any other retirement plan for two years after the initial contribution. If you are under 59½, distributions taken in the first two years will be subject to a 25% penalty.
  • Contributions count against 401(k) contributions. If you have a 401(k) from any other employer, contributions you make to your SIMPLE will count toward the $18,000 you could otherwise contribute to your 401(k) for that year.

Consensus: These plans work well as a start-up retirement savings plan for small businesses with 100 or fewer employees.

Defined Benefit Plan

Similar to traditional pension plans most common in previous generations work for certain self-employed workers.


  • Contribution limits. How much you can contribute depends on an actuarial formula that takes into consideration factors such as your age, but could potentially be in excess of $100,000 per year.
  • Combining with other plans. You can contribute to a defined benefit plan while simultaneously contributing to a 401(k) or SEP IRA.
  • Taxes. Contributions may be eligible to be written off as business expenses.
  • Tax deferral. Growth of contributions is tax-deferred.


  • Cost. Relatively complicated to set up and potentially costly to maintain.
  • Lack of flexibility. You fund the plan at a set level, and you are committed to that even if you are less profitable in a given year.
  • Employees. You have to make contributions for employees.

Consensus: This may work for solo self-employed workers who have higher, stable incomes and want to contribute a lot to their retirement savings.

Saving for retirement by contributing to one of these plans reduces your taxable income and could lower your tax bracket. Potentially this could save you money in the short term, while benefiting your financial retirement success in the long term. Contact your adviser today to set up an appointment.