What Are the Self-Employed IRA/Retirement Plan Options and the Contribution Limits?

Retirement planning can feel overwhelming, especially for those who are self-employed. However, there are unique retirement plans specifically designed for independent self employed workers. In this post, we’ll explore the different types of retirement plan options, their contribution limits, and how to select the best option for your financial situation.

Understanding Self-Employed Retirement Planning

When you're self-employed, you might not enjoy the same retirement benefits as traditional employees. Retirement plans specifically designed for the self employed, provide significant opportunities for retirement savings tailored to independent workers. These accounts allow you to contribute to a retirement fund, often with tax advantages that can enhance your long-term wealth accumulation.

An Example of What This Means

Imagine you are a freelance graphic designer. Instead of relying on a 401(k) provided by an employer, you can open a SEP IRA or a Solo 401(k) to save for retirement flexibly. This means you can build your retirement fund while still focusing on your business.

Types of IRAs/Retirement Plans For The Self-Employed

Several retirement accounts are available for self-employed individuals without any employees. Here are the three most common ones:

1. Simplified Employee Pension (SEP) IRA

The SEP IRA is a favored choice among self-employed individuals and small business owners. It allows for higher contribution limits compared to traditional or Roth IRAs. The SEP IRA is very easy to establish and maintain making it a very popular choice.

Contribution Limits

The contribution limit for 2025 is the lesser of 25% (20% in some cases for the self-employed) of the employee’s compensation or $70,000.. This flexibility is particularly beneficial for those with varying income levels.

2. Solo 401(k)

The Solo 401(k), also known as an Individual 401(k), is suitable for self-employed individuals without employees (except spouses). This account permits contributions as both an employer and an employee, maximizing your savings potential.

Contribution Limits

A Solo 401(k) allows you to make contributions as both an employer and an employee, enabling you to save a substantial amount for retirement. For 2025, the employee contribution limit is $23,500, with a catch-up contribution of $7,500. Additionally, the employer can contribute 20-25% of your net income, up to a maximum total contribution of $70,000, with an extra $7,500 if you are 50 or older (totaling $77,750). If you are between 60 and 63, the catch-up contribution is $11,250 instead of $7,500, bringing the total to $81,250. The percentage the business can contribute depends on its structure. This contribution limit applies to each participant, so if your spouse also earns from the business, they can contribute too.

In certain situations, you might be able to save more money and a larger percentage of your income with the Solo 401(k) compared to the SEP IRA.

The Solo 401(k) also offers the option to establish a ROTH account, allowing you to pay income tax on your contributions now, with tax-free withdrawals in the future.

The Solo 401(k) includes a loan provision option for your account. This enables you to borrow up to 50% of your account, with a maximum limit of $50,000.

Compared to a SEP IRA, the Solo 401(k) is a more complex but comprehensive retirement plan. If you have employees or plan to hire soon, you might want to explore other retirement plan options.

3. Traditional and Roth IRAs

An IRA (Individual Retirement Account) is a savings account designed for retirement, available to both business owners and non-business owners. It operates independently of any business. Traditional IRAs and Roth IRAs share some similarities but also have differences. 

Contribution Limits

For both Traditional and Roth IRAs, the contribution limit for 2025 is $7,000, or $8,000 if you are 50 or older. While these limits are lower compared to SEP IRAs and Solo 401(k)s, they are still a very popular option.

Choosing the Right IRA/Retirement Plan Option

Self-Employed retirement plans are invaluable resources for independent workers aiming to secure their financial futures. By understanding the contribution limits and specifics of SEP IRAs, Solo 401(k)s, and Traditional and Roth IRAs, you can make more informed decisions for your retirement planning.

Evaluate your personal circumstances, consider your future objectives, and seek guidance from a professional if needed. Taking action now secures not just your financial peace of mind but also your desired lifestyle in your later years.

Are you ready to learn more about what option makes sense for you? Are you in a position where you need to make a contribution? We have provided guidance to countless self-employed business owners. If you are ready to learn more, click the button below to talk to us today!

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HunterRIDGE Wealth Management is Long Island's premier wealth management firm. From growing wealth to planning for retirement, we are with you every step of the way. To learn more about how we work with our clients and our planning process click here. 

For educational purposes only. Not to be relied upon as financial, tax, or legal advice. 

This information was obtained from sources believed to be reliable, we do not guarantee its accuracy, completeness, or fairness. We have relied upon and assumed without independent verification the accuracy of all information available from public sources.