Retirement Plans for the Self-Employed

A recent study conducted by The Pew Charitable Trusts, an independent nonprofit organization, revealed that just over 1 in 10 self-employed individuals in a single-person business participate in a retirement plan. In larger companies, meanwhile, 72% of employees utilize a 401(k) at work.

If you’re a small business owner or self-employed, saving for your golden years is even more critical since you lack the luxury of employer-provided retirement benefits. Fortunately, several options can help boost your retirement savings and possibly allow you to stash away significantly more than you ever could with an employer plan.

Defined benefits versus defined contribution plans

Before we explore your options, know that retirement plans fall into one of two classifications: defined benefit plans (promising a specified monthly benefit at retirement, e.g., Social Security or a pension) or defined contribution plans that don’t and are generally tax-deferred (e.g., a 401(k) or IRA).

Defined contribution retirement plans for the self-employed

Traditional IRA

A traditional IRA (individual retirement account) is a tax-deferred account, meaning you’ll pay taxes on the funds at a later time. Any contributions you make are typically funded with pre-tax dollars, and earnings grow tax-deferred until you withdraw them in retirement. 

Who should open a traditional IRA?

A traditional IRA is ideal for individuals who are just starting to save for retirement and those who prefer a simple account setup as it’s the easiest type of retirement account to establish and doesn’t require any special tax filing.

2026 IRA contribution limits

If you’re under 50 years of age, the maximum annual contribution limit is $7,500 (known to change annually). Anyone older can contribute up to $8,600.

Traditional IRA withdrawal penalties

An early withdrawal penalty generally applies to those who take money from their IRA before reaching age 59½, specifically 10% of the amount withdrawn and also taxed as income. Since a traditional IRA is a tax-deferred account, the IRS requires you to eventually pay taxes on your assets. This is where required minimum distributions (RMDs) come into play, meaning you must begin withdrawing a minimum amount from your IRA at age 73 (increasing to 75 in 2033).

Other things to know

Anyone can open and contribute to a traditional IRA account—regardless of their reported income—but those seeking tax-deductible contributions (which involve funding with after-tax dollars) should know the IRS has income restrictions based on earnings and whether you or your spouse currently participate in other qualified retirement plans (e.g., a 401(k)).

Traditional IRAs are individual plans, meaning employees (if applicable) can set up and contribute to their own IRAs.

Roth IRA

A Roth IRA differs from a traditional IRA in that tax benefits are delayed in this case, with contributions made via after-tax dollars so you can enjoy tax-free withdrawals on qualified distributions during retirement.

Who should open a Roth IRA?

A Roth IRA is particularly beneficial if you desire more withdrawal flexibility (and to do so without penalty), don’t want to worry about required minimum distributions (RMDs) in retirement, or wish to diversify your retirement savings with both tax-free and taxable accounts.

2026 Roth IRA contribution limits

If you’re under 50 years of age, the maximum annual contribution limit is currently $7,500 (limits do change annually). Anyone older you can contribute up to $8,600.

Roth IRA withdrawal penalties

You can withdraw amounts equal to your Roth IRA contributions penalty-free and tax-free at any time and for any reason, even if you’re under age 59½. Those who withdraw earnings (investment growth earned from the aforementioned contributions) prior to this, however, will incur a 10% early withdrawal penalty. Even after reaching age 59½, you must have held the account for a minimum of five years to withdraw earnings (known as the “five-year rule”). As with any rule, though, exceptions do exist.

Unlike traditional IRAs, Roth IRAs do not require minimum distributions (RMDs)—meaning you’re not obligated to make withdrawals during your lifetime. Fewer restrictions are also in play if you plan to leave the account as an inheritance.

Other things to know

Roth IRAs have income limits, unlike  their traditional counterparts. For example, if you file taxes as a single in 2026, your modified adjusted gross income (MAGI) must be less than $168,000 ($252,000, for joint filers) in order to contribute to a Roth IRA. An IRS-approved method called a backdoor IRA does provide the ability to sidestep such limits, requiring you possess and convert a portion (or all) traditional IRA funds to a Roth IRA.

SEP IRA

Simplified employee pensions (SEP) IRAs are tax-deferred accounts, meaning you fund the account with pre-tax dollars and pay taxes when you withdraw money during retirement.

Who should open a SEP IRA?

SEP IRAs are particularly beneficial for business owners with few or no employees as they offer the flexibility to decide when and how much to contribute, quite useful for those with seasonal businesses or fluctuating incomes.

2026 SEP IRA contribution limits

You can currently contribute up to 25% of employee or owner compensation or a maximum of $72,000 (whichever amount is less).

SEP IRA withdrawal penalties

Similar to traditional IRAs, early SEP IRA withdrawals prior to age 59½ may incur a 10% penalty (with required minimum distributions hitting in retirement).

Other things to know

To open a SEP IRA, you must be a sole proprietor, business owner, in a partnership, or earn self-employment income by providing a service. These types of IRAs are funded entirely by the employer, who has the flexibility to choose when and how much to contribute.

While some exceptions do apply, SEP IRA eligibility generally extends to employees over the age of 20 who’ve worked for three out of the last five years and received at least $750 in annual income from the business.

All eligible employees must be included in the plan—meaning the ability to “opt-in” doesn’t exist—and receive the same contribution as a percentage of their salary, sometimes limiting the ability to make larger personal contributions. Importantly, employees are 100% vested immediately.

SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a tax-deferred retirement account designed to provide benefits for business owners and employees. While similar to a SEP IRA, it’s better suited for larger businesses with up to 100 employees as both owners and employees can share funding responsibilities.

Who should open a SIMPLE IRA?

A SIMPLE IRA is ideal for larger businesses (up to 100 employees) since it allows both owners and employees to contribute to the plan.

2026 SIMPLE IRA contribution limits

Contribution limits are based on the size of your employer and your age…

For companies with more than 25 employees:

Employees can contribute up to $17,000 or 100% of their compensation—whichever is less—with an additional $4,000 “catch-up limit” impacting anyone aged 50+. This catch up limit, increases to $5,250 for those between the age of 60 and 63.

For companies with 25 or less employees:

Employees can contribute up to $18,100 or 100% of their compensation—whichever is less—with an additional $4,000 “catch-up limit” impacting anyone aged 50+. The catch up limit increases to $5,250 for those between the age of 60 and 63.

SIMPLE IRA withdrawal penalties

SIMPLE IRA distribution rules are similar to those for a traditional IRA but with a key difference: making non-qualified withdrawals during the first two years of participation triggers an additional 15% early withdrawal penalty on top of the standard 10% penalty (withdrawal taxes are not included). As with other tax-deferred retirement plans, required minimum distributions (RMDs) apply.

Other things to know

To establish a SIMPLE IRA, businesses must have 100 or fewer employees and cannot maintain any other employer-sponsored retirement plans.

Contributions made to employee accounts are deductible as business expenses. To participate in a SIMPLE IRA, employees must have earned at least $5,000 in any two of the preceding years and expect to earn at least $5,000 in the year they become eligible.

Employers can choose to make these eligibility requirements less strict and are required to contribute to employee accounts via one of two methods: either dollar-for-dollar matching contributions (up to 3% of each employee’s compensation) or non-elective contributions amounting to 2% of each employee’s compensation, regardless of whether they make their own contributions.

Solo 401(k)

Also known as an “individual 401(k),” a solo 401(k) is a retirement plan that shares many rules and requirements with an employer-sponsored 401(k). One key difference, however, is that the plan owner cannot have any full-time employees; spouses are the only other party allowed to participate in this type of plan, which offers a wider breadth of investment opportunities (e.g., real estate and cryptocurrencies) than employer-sponsored plans.

Who should open a solo 401(k)?

A solo 401(k) is ideal for individuals looking to maximize their retirement savings or those seeking the flexibility to contribute even more during their most profitable business years.

2026 solo 401(k) contribution limits

As a business owner, you can contribute to a solo 401(k) both as an employer and employee. Your total contributions cannot exceed $72,000, however, with an additional catch-up contribution of $8,000 available if you’re eligible. Additionally, if you’re between the age of 60 and 63, you can contribute $11,250 as opposed to $8,000.

As an employee, you can contribute up to $24,500 (with an additional $8,000 catch-up contribution available for those age 50+). This increases to $11,250 for 60-to-63-year-olds (allowing for a total employee contribution of $35,750), with all contributions deducted from your paycheck.

Employers can make an additional matching contribution of up to 25% of profits or 25% of net self-employment income for sole proprietors or single-member LLCs.

Solo 401(k) withdrawal penalties

An early withdrawal tax penalty generally applies if you remove money from your solo 401(k) before age 59½ (10% of the amount withdrawn), and you’ll also owe income tax on the same. Required minimum distributions (RMDs) are also applicable to solo 401(k)s.

Other things to know

Spouses are subject to the same contribution limits for employer-sponsored 401(k)s. For 2026, the contribution limit is $23,500 with an additional $8,000 for individuals age 50+. Sixty to 63-year-olds can also add a catch-up contribution of $11,250, bringing their total employee contribution to $35,750.

You can contribute to a Roth IRA, traditional IRA, and solo 401(k) in tandem (so long as you don’t exceed aggregated contribution limits) and also have the option to set up either a traditional solo 401(k) or Roth solo 401(k)—which operates similarly to Roth IRA tax treatment.

Defined benefit retirement plans for self-employed individuals

A defined benefit plan functions like an employee pension, offering a guaranteed income stream during retirement. Contributions are typically tax-deductible, with distributions taxed as ordinary income.

Who should open a defined benefit plan

A defined benefit plan, ideal for small business owners or self-employed individuals with a substantial income (typically no less than $250,000 per year), is suitable for those looking to save a large amount for retirement while simultaneously reducing their tax liability.

2026 contribution limits

Your contribution limit is determined by a calculation that accounts for your age, expected investment returns, and the retirement benefit you will receive.

Other things to know

Plan contributions are mandatory and can fluctuate based on the plan’s investment performance and eligible employee demographics.

Establishing and maintaining a defined benefit plan is often more expensive compared to other retirement options, and it’s necessary to enroll all eligible employees—typically those who have at least one year of service, work a minimum of 1,000 hours per year, and are over age 20. Defined benefit plans also involve more administrative responsibilities since an actuary must file forms and determine funding levels and tax deduction limits.

How a health savings account (HSA) can boost retirement savings

If you’re enrolled in an HSA-eligible health plan, you should consider opening one to help save for future medical expenses—especially since you can roll contributions over from year to year and use them later in life when facing higher medical costs as a retiree. More specifically, in 2026, an HSA can help individuals sock away up to $4,400 for self-only coverage and $8,750 for family coverage. If you’re 50 or older, you can contribute an extra $1,000.

Just know that any amount withdrawn for non-medical purposes is subject to both income taxes and a (staggering!) 20% early withdrawal penalty for those under age 65; HSA withdrawals made for non-medical uses after this age are still subject to tax but don’t incur this consequence.

In sum: retirement plan options for self-employed individuals

You’ll likely encounter several challenges and headaches while operating your own business. Now that you’re familiar with the retirement savings options discussed in this article, this specific concern need not rank among them.

Still have questions about which retirement plan options are best for you? Schedule a FREE discovery call with one of our CFP® professionals to get them answered.

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Vision Retirement is an independent registered advisor (RIA) firm headquartered in Ridgewood, New Jersey. Launched in 2006 to better help people prepare for retirement and feel more confident in their decision-making, our firm’s mission is to provide clients with clarity and guidance so they can enjoy a comfortable and stress-free retirement. Schedule a no-obligation consultation with one of our financial advisors today!

Disclosures:
This document is a summary only and is not intended to provide specific advice or recommendations for any individual or business.