How to Save for Retirement as a Sole Proprietor

SIMPLE IRA

What it is: Similar to a traditional IRA but with higher contribution limits, a SIMPLE (Savings Incentive Match Plan for Employees) IRA could be ideal for self-employed people who want to contribute more to a tax-deferred account, says Evan Lemoine, a CPA in Providence, Rhode Island. 

As befits the name, SIMPLE IRAs are relatively easy to set up and maintain. This can make them an especially attractive option if you rely on freelance work or gig economy jobs in which income can ebb and flow, Lemoine says. “If you’re unsure how much you’re going to bring in and you’re wanting to start something more basic, the SIMPLE is a great plan.” 

How it works: With a SIMPLE IRA, a sole proprietor is treated as both employer and employee. For the 2023 tax year, you can contribute up to $15,500 from your net earnings from self-employment into the plan, plus another $3,500 if you’re 50 or older. Regardless of how much you contribute, you must add an employer “match” of up to 3 percent of your net earnings for the year. Net earnings are typically your gross income from self-employment minus allowable business expenses.

Starting in 2023, SECURE 2.0 allows investors to make Roth contributions to SIMPLE IRAs, meaning you can pay taxes on the money going in but make tax-free withdrawals later.

What to watch for: The match calculation for SIMPLE IRAs gets more complicated if you have employees. If you think you might eventually take on staff, “you’ll want to let your [financial] professional know up front, as that may impact your plan selection,” Lemoine says.

SEP IRA

What it is: A SEP (Simplified Employee Pension) IRA is designed for business owners who want to be able to make even larger annual contributions than with a SIMPLE IRA.  

How it works: If you are self-employed, you can generally put as much as 20 percent of net earnings from your business into a SEP IRA, up to a 2023 maximum of $66,000.  

As with SIMPLE IRAs, SECURE 2.0 opened up SEP IRAs to the Roth contribution option. 

What to watch for: While the overall contribution limit on a SEP IRA is higher than for a SIMPLE IRA, you’d likely need to have relatively high earnings from self-employment to make it worthwhile, Lemoine says. 

Here’s why: The current SIMPLE IRA contribution limit of $19,000 (for those over age 50) is 20 percent of $95,000, so you’d have to net at least that much to be able to make a SEP contribution that’s bigger. In 2021, the median U.S. income from self-employment was about $63,000 for men and $38,000 for women, according to Census Bureau data.

Solo 401(k)

What it is: A solo 401(k) plan is akin to a traditional 401(k), except that it generally only covers one worker (it can also include a spouse who earns income from your business). 

How it works: The business owner can contribute to the plan as an employee and as an employer. The 2023 contribution limit is $22,500 ($30,000 for those age 50 or over) plus 20 percent of net self-employment earnings, up to a total of $66,000 ($73,500 for 50 and over). You can contribute on either a pretax or after-tax (Roth) basis. 

SECURE 2.0 gives sole proprietors more flexibility in starting and contributing to a solo 401(k). Previously that had to be done by the end of a tax year for the contribution to be deductible for that tax year. Now, you have until the tax-filing deadline in April of the following year. Next year, for example, you can establish a solo plan by April 15 and have it count on your 2023 taxes.

What to watch for: If your solo 401(k) account balance is $250,000 or more, you must file an IRS Form 5500-EZ with your tax return. And the rules for a solo 401(k) are more complex than those for an IRA.

If you hire staff for your business, you will no longer qualify for the solo 401(k). 

Multiple Employer Plans (MEPs)

What they are: These joint plans allow employers, including sole proprietors, to share the same retirement savings plan and split some of the administrative expenses. The SECURE Act created a new type of MEP, called a Pooled Employer Plan (PEP). 

How they work: A traditional MEP allows companies that do not have direct ties but share a common element, such as a similar field or geographic proximity, to join together to offer a workplace savings plan. 

PEPs allow any business to join, regardless of whether it is related to other participants. They were introduced for 401(k) plans in 2021 under the original SECURE Act and expanded to 403(b) plans in 2023 by SECURE 2.0.  

PEPs and MEPs have the same contribution limits as 401(k)s; you can contribute up to $22,500 annually ($30,000 for those 50 and older) in 2023.

What to watch for: With an MEP, you can only make contributions with the earnings from the business you own. If you are also an employee of another business, you can’t put earnings from that job into the pooled plan. 

To qualify as a PEP, a plan must have a “pooled plan provider” registered with the U.S. Labor and Treasury departments.

As a general matter, the rules for MEPs and PEPs are more complex than those for an IRA, so be sure you understand them before joining such a plan.