Self-Employed Retirement Planning Strategies

Retirement planning can be more complicated when you are self-employed. There is no employer automatically enrolling you in a pension plan or choosing a workplace 401(k) for you. Instead, you have to decide how much to save, which retirement account to use, how to manage taxes, and how your business fits into your eventual retirement.

The good news is that self-employed workers have access to several powerful retirement savings strategies. Depending on your business structure, income and whether you have employees, a SEP IRA, Solo 401(k), SIMPLE IRA, traditional IRA or Roth IRA may be appropriate.

The challenge is choosing the right combination and understanding the contribution rules. The best plan for someone with $50,000 of fluctuating business income may be very different from the plan used by a business owner earning several hundred thousand dollars a year.

Why Retirement Planning Is Different When You're Self-Employed

Employees often have retirement contributions deducted directly from their paychecks and may receive an employer match. Self-employed individuals have to create that system themselves.

You also have to account for business cash flow. A strong year may provide an opportunity to make a large retirement contribution, while a slower year may require you to preserve cash for operating expenses.

This makes flexibility particularly valuable when selecting a retirement plan.

Retirement Savings Options for the Self-Employed

Several retirement accounts can work for self-employed individuals. The most important options include SEP IRAs, Solo 401(k)s, SIMPLE IRAs, traditional IRAs and Roth IRAs.

SEP IRA

A SEP IRA, or Simplified Employee Pension, allows a business owner to make employer contributions to SEP-IRAs established for eligible employees and for the owner.

For 2026, SEP contributions are generally limited to the lesser of 25% of compensation or $72,000. Special calculations apply when determining the contribution for a self-employed individual because compensation is calculated differently for someone earning self-employment income.

This distinction is important. A sole proprietor generally cannot simply take 25% of the number appearing as net profit on Schedule C and assume that is the allowable SEP contribution. The IRS requires adjustments for the deductible portion of self-employment tax and the owner's retirement contribution.

One attractive feature of a SEP IRA is flexibility. A business generally does not have to make a contribution every year. However, when contributions are made, eligible employees generally must receive contributions under the plan's rules using the same contribution percentage.

Solo 401(k)

A Solo 401(k), also called a one-participant 401(k), can be particularly useful for a self-employed individual who has no employees other than a spouse.

One of the biggest advantages is that the owner can potentially contribute in two different capacities: as an employee and as the employer.

For 2026, the employee elective-deferral limit for a 401(k) is $24,500. Individuals age 50 or older can generally make an additional $8,000 catch-up contribution.

The business can also make an employer contribution, subject to the applicable compensation and plan rules. Total annual additions, excluding catch-up contributions, are generally limited to $72,000 in 2026, subject to the compensation rules.

For a self-employed individual, the calculation of the employer contribution is more complicated than simply taking 25% of Schedule C profit. The IRS provides specific worksheets and calculations because self-employment tax and the owner's own contribution affect the calculation.

Depending on the plan document, a Solo 401(k) can also provide features such as Roth contributions and, in some plans, participant loans. The exact features depend on the plan provider and plan document.

SIMPLE IRA

A SIMPLE IRA can be useful for a small business that has employees and wants a relatively straightforward employer retirement plan.

For 2026, employee salary-reduction contributions to a SIMPLE IRA are generally limited to $17,000.

Participants age 50 or older can generally make a $4,000 catch-up contribution. For participants who are age 60, 61, 62 or 63 during 2026, the higher SECURE 2.0 catch-up limit is $5,250.

SIMPLE IRA plans also generally require employer contributions. Depending on the plan, the employer may use a matching contribution or a nonelective contribution.

This makes a SIMPLE IRA potentially attractive for a small business that wants to provide retirement benefits to employees without the complexity of a larger 401(k) plan.

Traditional IRA

A traditional IRA is another option for self-employed individuals. It generally has a much lower contribution limit than a SEP IRA or Solo 401(k), but it can still be useful as part of an overall retirement strategy.

For 2026, the IRA contribution limit is $7,500, plus a $1,100 catch-up contribution for individuals age 50 or older.

Whether a traditional IRA contribution is deductible depends on several factors, including income and whether you or your spouse are covered by a retirement plan.

For more information, see our article on Traditional IRA Withdrawal Rules.

Roth IRA

A Roth IRA uses after-tax contributions rather than deductible contributions. If the applicable requirements are satisfied, qualified withdrawals can be tax-free.

Roth IRA eligibility is subject to income limits, so high-income self-employed individuals may not be able to make a direct Roth IRA contribution.

Roth accounts can nevertheless play an important role in retirement planning because having a combination of taxable, tax-deferred and tax-free retirement assets can provide greater flexibility when managing taxable income in retirement.

SEP IRA vs. Solo 401(k) vs. SIMPLE IRA

There is no single retirement plan that is right for every self-employed person. The choice often depends on income, employees, desired contribution amount and how much flexibility you need.

• SEP IRA: Often attractive for businesses wanting large employer contributions and simple administration.
• Solo 401(k): Often attractive for an owner with no employees other than a spouse who wants both employee and employer contribution opportunities.
• SIMPLE IRA: Designed for small employers and generally includes contributions for eligible employees.
• Traditional or Roth IRA: Useful individual accounts that can complement a business retirement plan.

The contribution limits are only one part of the decision. Plan costs, administrative requirements, employee eligibility, investment choices, Roth availability and withdrawal features can also matter.

Tax Benefits of Retirement Contributions

Retirement accounts can provide valuable tax benefits, but the type of benefit depends on the account.

Tax-Deferred Growth

Traditional retirement accounts generally allow investments to grow without annual taxation on the investment income inside the account. Taxes are generally paid when taxable amounts are withdrawn.

This tax deferral can allow more money to remain invested over time, potentially increasing the amount available for retirement.

Tax-Deductible Contributions

Contributions to certain self-employed retirement plans can provide a tax deduction. However, the deduction rules depend on the type of plan and the taxpayer's business structure.

For self-employed individuals, the calculation can be more complicated than simply deducting a percentage of business revenue.

The IRS specifically notes that a self-employed person's own retirement-plan deduction is generally reported on Form 1040 Schedule 1 rather than deducted as a Schedule C business expense.

Catch-Up Contributions

Catch-up contributions can help older business owners accelerate their retirement savings.

In 2026, the standard 401(k) catch-up contribution is $8,000 for individuals age 50 and older. A higher $11,250 catch-up limit applies for participants who turn age 60, 61, 62 or 63 during 2026 when the applicable plan qualifies.

SIMPLE IRA participants have separate catch-up limits, including the higher $5,250 limit for ages 60 through 63 in 2026.

Saver's Credit

Lower- and moderate-income retirement savers may also qualify for the federal Saver's Credit, subject to income and other eligibility requirements.

The credit is different from a deduction. A deduction reduces taxable income, while a tax credit directly reduces the amount of tax owed.

Eligibility and income limits change over time, so check the current IRS rules for the tax year involved rather than relying on an old income threshold.

Balancing Business Investment With Retirement Savings

One of the biggest challenges for business owners is deciding how much money to reinvest in the business and how much to put toward retirement.

Reinvesting profits can help a business grow, but business ownership should not be the only retirement asset you have.

Create a Retirement Savings Target

Instead of contributing whatever happens to be left at the end of the year, establish a retirement savings target based on your expected retirement income needs.

In a strong business year, you may be able to increase contributions. In a weak year, preserving enough cash to keep the business operating may take priority.

Maintain an Emergency Reserve

A separate emergency fund can help prevent an unexpected business or personal expense from forcing you to sell investments or withdraw retirement assets at an inconvenient time.

The appropriate emergency reserve depends on your household and business circumstances. Someone with highly predictable revenue may need a different cash reserve from an owner whose income varies substantially from month to month.

Separate Business and Retirement Goals

Your business may be valuable, but its eventual sale should not be treated as guaranteed retirement income.

Business valuations can change, buyers may not be available when you want to sell, and the business may be worth less than expected at retirement.

Building financial assets outside the business can therefore provide another source of retirement security.

Planning Your Business Exit

For many self-employed individuals, the business itself is one of their largest assets. Retirement planning should therefore include an exit strategy well before the intended retirement date.

Selling the Business

If you expect to sell your business, start preparing years before the sale.

A prospective buyer may examine revenue, profitability, customer concentration, contracts, employees, intellectual property, equipment and the owner's role in day-to-day operations.

A business that depends entirely on its owner can be more difficult to transfer than a business with documented processes and a management structure that can operate without the owner.

Passing the Business to Family or Employees

A family succession or employee buyout can require years of preparation.

Ownership transfers can also create tax, legal and estate-planning consequences. A business succession plan should therefore be coordinated with your broader estate plan and reviewed with qualified professional advisers.

Continuing to Work Part-Time

Retirement does not necessarily have to mean shutting down the business completely.

Some owners reduce their hours, delegate management responsibilities or transition into consulting. This can provide retirement income while allowing the owner to gradually reduce their involvement.

Social Security for Self-Employed Individuals

Social Security can be an important part of retirement income for self-employed workers. Your self-employment tax helps fund Social Security and Medicare.

How Self-Employment Taxes Affect Benefits

Self-employed individuals generally pay both the employer and employee portions of Social Security and Medicare taxes through self-employment tax, subject to the applicable rules and wage limits.

Because Social Security benefits are based on covered earnings, accurately reporting self-employment income can affect your eventual benefit.

Your Highest 35 Years Matter

Social Security retirement benefits are based in part on your earnings record. The benefit calculation generally uses your highest 35 years of indexed earnings.

If you have fewer than 35 years of covered earnings, years with no earnings can be included in the calculation.

When Should You Claim Social Security?

You can generally begin retirement benefits at age 62, but claiming before full retirement age results in a permanently reduced monthly benefit.

For people born in 1960 or later, full retirement age is 67. Delaying retirement benefits beyond full retirement age can increase the monthly benefit up to age 70.

For perspective, the Social Security Administration says that someone who earned the taxable maximum in every year beginning at age 22 and started benefits in 2026 could receive a maximum monthly benefit of $2,969 at age 62, $4,152 at full retirement age, or $5,181 at age 70. Most retirees receive less because their earnings history differs from this maximum-earnings example.

Don't Forget Health Insurance

Retirement planning for a self-employed person should include health insurance costs.

Unlike an employee who may have access to a group plan, a self-employed person may need to arrange individual coverage before becoming eligible for Medicare.

If you plan to retire before age 65, healthcare premiums and out-of-pocket expenses can represent a significant part of the retirement budget.

Build a Retirement Income Plan

Accumulating retirement savings is only half of the problem. Eventually, those savings need to provide income.

A self-employed retirement plan should consider:

• Expected Social Security benefits
• Retirement account balances
• Taxable investment accounts
• Business income or a future business sale
• Housing costs and mortgage debt
• Healthcare costs
• Taxes during retirement
• Desired retirement spending
• Inflation
• Longevity
• Potential long-term-care costs

The goal is not simply to reach a particular account balance. The goal is to create a sustainable income strategy that can support the lifestyle you want after you stop working.

Using Retirementize to Plan for Retirement

Self-employed individuals often have more moving parts in their retirement plans than employees. Business income, retirement accounts, Social Security, taxes and a potential business sale may all need to be considered together.

The Retirementize retirement income calculator can help you bring your retirement income sources and expenses together so you can explore different retirement scenarios.

Try different retirement ages, savings levels and income assumptions to see how changes today could affect your future retirement plan.

Common Self-Employed Retirement Planning Mistakes

• Relying entirely on the business: A business can be a valuable asset, but its future sale value is uncertain.
• Waiting until the business is profitable to start saving: Even smaller contributions can establish a retirement savings habit and benefit from long-term compounding.
• Ignoring taxes: The contribution that creates the largest deduction today may not necessarily produce the best long-term tax outcome.
• Failing to account for employees: SEP and other employer plans can create obligations toward eligible employees.
• Underestimating healthcare costs: Retiring before Medicare eligibility can create a significant funding gap.
• Not planning the exit: A business transition can take years, particularly if the owner expects to sell or transfer the company.

Fun Facts

Frequently Asked Questions

What is the best retirement plan for a self-employed person?

There is no single answer. A SEP IRA, Solo 401(k), SIMPLE IRA, traditional IRA or Roth IRA may be appropriate depending on income, employees, contribution goals, plan costs and tax circumstances.

How much can a self-employed person contribute to a SEP IRA?

For 2026, SEP contributions are generally limited to the lesser of 25% of compensation or $72,000. The calculation for a self-employed owner requires special adjustments, so the actual allowable contribution may be lower than simply taking 25% of business profit.

Can a self-employed person have a Solo 401(k)?

Yes. A one-participant 401(k) is generally available to a business owner with no employees other than a spouse. The owner can potentially make both employee elective-deferral and employer contributions.

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

It can be possible to have both. However, contribution limits and IRA deduction or Roth eligibility rules can interact with your circumstances. The fact that you have a Solo 401(k) does not automatically prevent you from contributing to an IRA.

Should I save for retirement or reinvest in my business?

This is usually a cash-flow and risk-management decision rather than an either-or choice. Reinvesting in a business may increase its future value, while retirement contributions build assets outside the business. Many owners benefit from establishing a baseline retirement contribution and then adjusting business reinvestment around that goal.

How much should a self-employed person have saved for retirement?

There is no universal target. Your required savings depend on your retirement age, spending, housing costs, Social Security, other income sources, expected investment returns and longevity. A retirement income projection is more useful than applying a single savings multiple to everyone.

Conclusion

Being self-employed gives you significant control over your career, but it also means taking responsibility for your own retirement plan.

SEP IRAs, Solo 401(k)s, SIMPLE IRAs, traditional IRAs and Roth IRAs each offer different combinations of contribution limits, tax treatment and flexibility. The right approach depends on your business, income, employees and retirement goals.

Don't overlook the other pieces of the puzzle. Social Security, healthcare, taxes, business valuation and your eventual exit strategy can all have a major impact on your retirement.

Most importantly, don't make your business the only thing standing between you and retirement. Building retirement assets outside the business can give you more flexibility when the time comes to reduce your workload or walk away completely.

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