How to plan for retirement when you’re self employed 

4 mins readLast updated February 7, 2024by Karen Barrett

Without an employer 401(k) or pension plan, self-employed people can feel frightened to retire. Luckily, there are a number of self-employed pension plans that will get you ready to enjoy your later years.

Making a plan for retirement requires a little more thought when you’re self-employed.

Thirty-seven per cent say they don’t make enough profits to put some aside for retirement and 12 per cent reported that they don’t see the need to save for retirement.

Worryingly, 21 per cent revealed they had already used retirement savings to support their business — something that is likely to have become more prevalent during the pandemic.  

Thankfully, there are lots of self-employed retirement options that can make the prospect of retirement less worrying.

If you’re considering transitioning to self-employment, or have always run your own business, here’s what you need to know about retirement plans for self-employed people.

The advantages of self-employed retirement

Undoubtedly, those who are saving for retirement on their own terms will have more freedom around how they save for retirement, and the ability to contribute more to their pots.

If you’d like to dial back your contributions one month and increase them the next, you’ll be free to do that.

The disadvantages of self-employed retirement

One of the biggest drawbacks of saving for retirement as a self-employed person is the lack of obvious savings vehicle and employer contributions.

You’ll need to be proactive in setting up a retirement fund and may need to save a higher percentage of your earnings than you would with the same salary.  

It can also be difficult to contribute a set, stable amount to your fund every month if you have a seasonal business or experience a quieter period.

To stop yourself being at a disadvantage to your employed peers, you’ll need to be proactive and make a clear plan on how to maintain a steady level of contributions up until retirement.

A financial advisor can help you put this together and minimize the stress of preparing for the future.  

Some business owners simply don’t plan on retiring, or say they’ll sell their business to fund retirement, but it’s foolish not to give yourself some sort of security net.

If you cannot work due to ill health or an accident, or fail to sell your business before you can claim social security, there will be no backup plan unless you’ve put one in place.  

The best retirement plan for self-employed people

This will depend entirely on your unique situation. Before you choose a plan, you’ll need to consider factors like:  

  • How much money you make per year 

  • If you have employees 

  • Whether you’re moving from employment to self-employment, or have always been self-employed 

  • How far away from retirement you are 

  • How much administration you’re happy to take on 

  • Whether you’re happy to pay fees to brokers  

Here’s a brief rundown of four of the most popular pension savings vehicles for self-employed people.

Solo 401(k)

What is it?

A solo 401(k) is structured very similarly to a company 401(k). You can make contributions as both an employee and employer, increasing the amount you’re able to save per year compared to just an employee’s contribution.  

Pros 

  • You can contribute up to $61,000 over the course of 2022, or up to $67,500 if you’re over 50.  

  • You contribute as both an employer and employee — maximizing the amount you can put away.  

  • If your spouse works for you, they can make generous contributions you can match.  

  • You don’t have to contribute every year. If you’re having a tough time with your business or want to reinvest profits to grow the business, you can pause your 401(k) contribution.

Cons

  • There is more paperwork than other options. Once your 401(k) exceeds $250,000 in worth, you’ll need to file annual paperwork with the IRS.  

  • You can’t opt for a Solo 401(k) if you have employees, other than your spouse.  

  • Your limit applies across both self-employed and employed 401(k)s — limiting your contribution upper limit if you’re an employee and business owner. 

Best for 

You get a high annual contributions limit, making this a great option for higher-earning self-employed individuals with no employees. 

Traditional and Roth IRAs

What is it? 

These options are the simplest for those entering self-employment. You can combine your old job’s 401(k) into your IRA and make tax-efficient contributions to your pension pot.  

The main difference between traditional and Roth IRAs is how they’re taxed. Traditional IRAs allow you to make tax-deductible contributions, while Roths focus on post-tax contributions and tax-free growth. 

Pros 

  • There is minimal paperwork and no filing requirements to set up either IRA. 

  • You can use these vehicles whether you have employees or not. 

  • For Roth IRAs, the tax treatment can be beneficial if your profits are still low. 

Cons 

  • There are income caps on most traditional and Roth IRAs, so you may not be eligible. 

  • Your contribution amount is very low, meaning you may not be incentivized to save a sufficient amount. 

Best for 

With an annual limit of just $6,000, or $7,000 for those 50+, these IRAs are best suited to those making a lower income, or who are just starting their self-employed journey. 

SEP IRA

Pros

  • Less admin than a solo 401(k) and no annual reporting, with a relatively high contribution limit.  

Cons 

  • If you have employees, you must contribute a matched percentage (the same as what you’re saving) to their pension plans too. 

Best for 

If you don’t have employees and want to minimize the administrative burden of your pension contributions, an SEP IRA will suit you well.

Or, it could work if you’re happy to contribute to your employees’ pensions, but need flexibility from your plan. 

SIMPLE IRA

Pros

  • It’s relatively easy to set up and accounts are owned by employees, who can manage them as they wish.  

  • You only have to make contributions of up to three per cent for each employee, allowing you to save more in your personal pot without a heavy financial burden. 

Cons

  • A SIMPLE IRA is inflexible and has lower contribution limits than something like a solo 401(k). 

  • There is more paperwork involved than with an SEP IRA.  

Best for 

Opt for a SIMPLE IRA if you have up to 100 employees and don’t want to have the contribution burdens solely on you.  

Other self-employed retirement options

This is far from an exhaustive list of retirement options for self-employed people.

For example, if you’re earning a very high amount consistently and are just a few years from retirement, you could opt for a defined benefit pension plan.

Your contributions are tax-deductible, and you can put in extremely large amounts (upwards of $80,000) per year, but the plans are often admin and fee heavy, and are extremely costly if you have employees.  

Karen is the Founder and CEO of Unbiased.com.

Karen Barrett

Karen Barrett is the Founder and CEO of Unbiased.com, the site that empowers people to make confident financial decisions. Karen, has been shortlisted for Scale-Up Entrepreneur of the Year at the Great British Entrepreneur Awards and British Businesswoman of The Year Finalist.