Self-employed retirement plans: 6 options to consider

Key takeaways

  • Self-employed retirement plans allow small-business owners to save for the future with tax benefits.
  • Each self-employed retirement plan has different rules for tax benefits, annual contribution limits, and employees.
  • A financial advisor* can help you compare options and then launch the right type of self-employed retirement plan for your situation.

Being your own boss has its perks. Unfortunately, having a built-in employer-sponsored retirement plan, like a 401(k), isn't one of them.

Whether you're a small-business owner or self-employed, you have a number of options to save for retirement. It doesn't matter if you're just getting started or if you've been contributing to retirement savings for a while.

Here's an overview of six self-employed retirement plan options that could work for you.

1. Traditional or Roth IRA

How it works

The best-known retirement savings option for most people, not just for the self-employed, is an individual retirement account (IRA). You open an IRA with your bank or investment brokerage firm. You then save money each year with a combination of tax breaks. There are two basic types of IRAs: traditional and Roth.

Who it's for

IRAs can make sense for nearly any small-business owner. They are simple to set up. There are no extra rules or restrictions related to your employees or business. An IRA is just your personal retirement account. You can contribute to a traditional IRA no matter how much you earn. A Roth IRA has income limits, though. In 2024, you cannot contribute to an IRA if you are single with an income over $161,000 or married with an income over $240,000.

Potential tax benefits

A traditional IRA offers an upfront tax break because contributions are tax-deductible on both state and federal income tax returns for the year you make the contribution. Whether you can claim a full or partial deduction depends on your income and, if you're married, whether your spouse is covered by an employer's retirement plan. You only pay ordinary income tax on traditional IRA money when you make qualified withdrawals during retirement.

As for a Roth IRA, there's no deduction for contributions. Income taxes are taken out of your paycheck before they can go into your savings. However, you're able to withdraw the money tax-free once you retire. The amount you can contribute to a Roth IRA is based on your modified adjusted gross income and tax filing status. If your income is beyond the limits, you cannot contribute to a Roth IRA.

So, which one is right for you? The answer ultimately depends on how much you're earning and what you expect your tax bracket to be at retirement. For example, if you're starting a new business in your 30s, you could consider a Roth IRA if you think your income will climb steadily. Someone who's in their 50s, on the other hand, may prefer to get the tax deduction now if they plan to sell their business once they reach retirement age.

You could also consider an IRA certificate of deposit (CD). An IRA CD works like any other CD. The bank holds your money in the CD for a set period of time, during which your savings earn interest. Once the CD matures, you can cash it out or roll it over into a new one. The difference is that an IRA CD has the tax benefits of an IRA and sometimes it carries a higher interest rate than a typical CD.

Contribution limits

For 2024, the annual contribution limit to either type of IRA is $7,000, plus an extra $1,000 if you're 50 or older.

2. SIMPLE IRAs

How it works

A Savings Incentive Match Plan for Employees (SIMPLE) IRA is like setting up an IRA with a higher contribution limit for you and all your employees. These accounts are inexpensive and easy to manage. However, as an employer, you must contribute to your employees' retirement accounts.

According to IRS rules, this type of plan requires the employer to make contributions in one of two ways:

  • Match your employees' contributions dollar-for-dollar up to 3% of their compensation, which is not limited by the annual compensation limit.
  • Contribute 2% of each eligible employee's compensation whether or not they contribute to the account.

Most funding for a SIMPLE IRA, however, comes from employee contributions, so the burden is not usually overwhelming for small-business owners.

Who it's for

A SIMPLE IRA is available to businesses with 100 or fewer employees. In general, the employer cannot maintain any other retirement plan and make contributions to a SIMPLE IRA in the same calendar year.

Potential tax benefits

A SIMPLE IRA gives you the same tax benefits and retirement savings options as a traditional IRA. The contributions you make for yourself are fully tax-deductible. You also delay taxes on your investment earnings if you keep the money in your SIMPLE IRA. You only owe income tax when you make withdrawals. If you make contributions for employees, you also can deduct those from your business income.

Contribution limits

For 2024, self-employed savers can contribute up to $16,000 to a SIMPLE IRA. You can tack on another $3,500 if you're 50 or older.

3. SEP IRAs

How it works

A Simplified Employee Pension Plan (SEP) IRA is another small-business retirement plan that covers owners and employees. It allows higher annual contributions than the SIMPLE IRA.

Only you, as the owner, contribute money to a SEP IRA. You pick what percentage of salary you want to cover for the year, like 2%, 5% or 12%. You then add this percentage for yourself and for each eligible employee. For example, if you want to save 7% of your salary, you'll also need to give each employee 7% of their salary for their accounts.

Who it's for

A SEP IRA is available to all businesses regardless of size, which means you can contribute if you're a sole proprietor with no employees or the founder of a startup with a staff of 150. However, a SEP IRA gets very expensive as you add employees and must contribute for each. It's usually best for smaller workforces or businesses with only one owner.

Potential tax benefits

You can set up a SEP IRA as either a traditional IRA, with an upfront tax deduction for contributions, or a Roth IRA, where your contributions must be after-tax but then retirement withdrawals are tax-free. Both allow you to plan for retirement with IRA savings benefits. If you contribute for employees, you can deduct those contributions from your business income.

Contribution limits

In 2024, you can contribute 25% of your annual compensation or $69,000, whichever is smaller. Remember, the salary contribution percentage you pick for yourself is also what you must contribute for eligible employees.

4. Solo 401(k)

How it works

A solo 401(k) is a simplified version of the standard 401(k) plans used by larger employers. You can save for retirement with much higher contribution limits with a solo 401(k) than an IRA outside of work.

Who it's for

A solo 401(k) is meant for businesses with no employees. Also known as a one-participant 401(k), there are no age or income restrictions for solo 401(k)s. While solo 401(k)s don't allow employees to participate, your spouse can be covered by this plan if they earn an income from the business. If you have employees, you cannot use a solo 401(k).

Potential tax benefits

You could use a traditional solo 401(k) or a Roth solo 401(k) for potential tax benefits. Once again, you receive the same tax benefits as you would with other self-employed retirement plans. A traditional solo 401(k) gives you an up-front tax deduction for contributions, but the withdrawals are taxed in retirement. A Roth solo 401(k) does not provide an immediate deduction, but your retirement withdrawals are tax-free. Both options delay taxes on your investment earnings while in the plan.

Contribution limits

The 2024 contribution limit for a solo 401(k) is $69,000, with an additional $7,500 catch-up contribution allowed if you're 50 or older.

5. Keogh plan

How it works

Keogh plans allow self-employed workers to create the same retirement plans offered by larger, incorporated businesses, such as a 401(k) or a pension. Keogh plans enable you to save even more money for retirement than the other self-employed retirement plans. However, these plans are the most expensive and complex to set up and manage. The specific rules will depend on how you design your Keogh plan.

Who it's for

Keogh plans are best for business owners with very high incomes. You might want to save beyond the annual contribution limits allowed with the other self-employed retirement plans. In this situation, it could be worth the cost and extra work of setting up a Keogh plan.

Potential tax benefits

Setting up a Keogh plan as a 401(k) has similar tax benefits to a solo 401(k). You can choose between traditional or Roth versions for your desired tax breaks. If you use a Keogh plan to set up a pension, you deduct all the money you contribute to fund your future guaranteed retirement income. In 2024, you can contribute enough to a pension to create a future annual retirement benefit of up to $275,000 per year.

Contribution limits

If you set up a Keogh plan as a 401(k), the 2024 contribution limit for a solo 401(k) is $69,000, with an additional $7,500 catch-up contribution allowed if you're 50 or older. If you set up a Keogh plan as a pension, there's no limit on how much you contribute. Instead, you pick how much you want for your future retirement income, which sets how much you must contribute per year to create your target payout.

6. Health savings account

How it works

You probably already know that you can snag a tax deduction for your health insurance premiums, but your policy may also include a hidden retirement benefit. If you're enrolled in a high-deductible plan, you could grow your assets using a health savings account (HSA).

These accounts are designed to let you save money for future medical expenses, but they can be a nice supplement to your existing retirement savings. That's because when you turn 65, you can withdraw money from an HSA for any purpose, not just medical.

Who it's for

You must have a high-deductible health insurance plan to contribute to a HSA. In 2024, you must have a deductible of at least $1,600 for self-coverage and $3,200 for family coverage. If your health insurance plan deductible is below these limits, you can't save through an HSA.

Potential tax benefits

HSAs are tax-advantaged accounts because:

  • Contributions are tax-deductible.
  • Earnings on contributed funds are tax-deferred.
  • Withdrawals used for qualified medical expenses are tax-free.

Once you turn 65, you can spend HSA savings on anything. It's not just limited to health care expenses. However, you owe income tax for withdrawing money for non-health care spending in retirement. You still get the most benefit by spending your HSA funds on health care.

Contribution limits

For 2018, the annual contribution limit to HSAs is $4,150 for individuals and $8,300 for families.

Comparing self-employed retirement plans

There's no one-size-fits-all retirement savings solution when you're self-employed or a small-business owner. What works for a freelancer may not be the right fit for someone running a locally owned business. Before launching your plan, consider meeting with a financial professional* to discuss these options. Together, you can find the best plan to achieve your retirement goals.

Make a financial plan for retirement. Citizens is here to help get you started.

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Citizens Wealth Management (in certain instances DBA Citizens Private Wealth) is a division of Citizens Bank, N.A. (“Citizens”).

Securities, insurance, brokerage services, and investment advisory services offered by Citizens Securities, Inc. (“CSI”), a registered broker-dealer and SEC registered investment adviser - Member FINRA / SIPC. Investment advisory services may also be offered by Clarfeld Financial Advisors, LLC (“CFA”), an SEC registered investment adviser, or by unaffiliated members of FINRA and SIPC providing brokerage and custody services to CFA clients (see Form ADV for details). Insurance products may also be offered by Estate Preservation Services, LLC (“EPS”) or an unaffiliated party. CSI, CFA and EPS are affiliates of Citizens. Banking products and trust services offered by Citizens.

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