Retirement Plan Options for the Self-Employed: A Guide by Vik Randhawa, CPA

 

Retirement Plan Options for the Self-Employed: A Guide by Vik Randhawa, CPA

As a self-employed individual, you wear multiple hats—entrepreneur, manager, and financial planner. One of the most critical financial decisions you’ll make is how to save for retirement. Unlike traditional employees who have access to employer-sponsored 401(k) plans, self-employed professionals must take charge of their own retirement savings. Fortunately, there are several excellent tax-advantaged retirement plans designed specifically for self-employed individuals.

In this post, I’ll walk you through the most popular retirement plan options, their benefits, and how to choose the right one for your needs.

1. SEP IRA (Simplified Employee Pension Plan)

Best for: Self-employed individuals and small business owners with few or no employees.

Key Benefits:

  • Allows contributions of up to 25% of net self-employment income or $69,000 (for 2024), whichever is lower.
  • Tax-deductible contributions reduce your taxable income.
  • Minimal administrative requirements.

Considerations:

  • If you have employees, you must contribute the same percentage of compensation for them as you do for yourself.
  • No Roth option—only pre-tax contributions are allowed.

Who Should Consider It?
A SEP IRA is ideal if you’re a high earner and want to maximize contributions while keeping administration simple.

2. Solo 401(k) (One-Participant 401(k))

Best for: Self-employed individuals with no employees (except a spouse).

Key Benefits:

  • Higher contribution limits: Up to $23,000 in employee deferrals (2024) plus an employer contribution of up to 25% of net earnings, for a total of $69,000 ($76,500 if age 50+).
  • Both traditional (pre-tax) and Roth options are available.
  • Potential for loan provisions (depending on the plan provider).

Considerations:

  • Requires annual IRS Form 5500 filing once assets exceed $250,000.
  • More administrative work compared to a SEP IRA.

Who Should Consider It?
If you’re looking to maximize contributions and want the flexibility of Roth contributions or loan options, a Solo 401(k) is a great choice.

3. SIMPLE IRA (Savings Incentive Match Plan for Employees)

Best for: Self-employed individuals with employees looking for a low-cost, easy-to-administer plan.

Key Benefits:

  • Employee salary deferrals up to $16,000 in 2024 ($19,500 if age 50+).
  • Employer contribution of either a 3% match or a 2% non-elective contribution.
  • Easier and less expensive to maintain than a traditional 401(k).

Considerations:

  • Lower contribution limits compared to SEP IRAs or Solo 401(k)s.
  • Mandatory employer contributions.

Who Should Consider It?
If you’re a small business owner with employees and want a plan that requires less administration than a traditional 401(k), a SIMPLE IRA is a solid option.

4. Traditional or Roth IRA

Best for: Self-employed individuals who want a simple retirement savings option with tax benefits.

Key Benefits:

  • Contribution limit of $7,000 in 2024 ($8,000 if age 50+).
  • Traditional IRAs provide tax-deductible contributions (subject to income limits).
  • Roth IRAs offer tax-free withdrawals in retirement.

Considerations:

  • Lower contribution limits compared to other self-employed plans.
  • Income restrictions apply to Roth IRA eligibility.

Who Should Consider It?
If you’re just starting out or looking for supplemental retirement savings, an IRA is a great option.

Which Retirement Plan is Right for You?

Your choice depends on several factors, including:
✔ How much you want to contribute annually
✔ Whether you have employees
✔ Your preference for pre-tax vs. Roth contributions
✔ How much administrative work you’re willing to handle

Quick Recommendation Guide:

  • High-earning sole proprietor? 👉 Solo 401(k) or SEP IRA.
  • Small business owner with employees? 👉 SIMPLE IRA or SEP IRA.
  • Just getting started or saving extra? 👉 Traditional or Roth IRA.

Final Thoughts

As a self-employed professional, planning for retirement is entirely in your hands. The good news is that with the right strategy, you can build significant wealth while enjoying tax advantages along the way.

Need help choosing the right retirement plan? As a CPA specializing in self-employed and small business finances, I can help you navigate the best options for your situation. Reach out today to start securing your financial future. Schedule your free consultation at https://www.vikprocpa.com

Vik Randhawa, CPA
Expert in Tax Planning & Financial Strategies for Entrepreneurs

Location: 35111 Newark Blvd Suite E, Newark, CA 94560, USA

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