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Self-Employed Retirement Plans in a Nutshell

Retirement plans for the self employed
5 Minute Read

Being self-employed comes with many advantages. You can set your own schedule and only work when you want to. You don’t have a boss to answer to or coworkers to appease. However, there are a couple of drawbacks. First, you need to find your own health insurance. Secondly, you need to save for retirement on your own. It’s up to you to decide on your health plan, but we can help you work towards your retirement goals. There are many self-employed retirement plans which we will discuss here.

The three main types of retirement plan options for the self-employed are the Solo 401(k), the SEP IRA and the SIMPLE IRA. Each has their own unique rules along with pros and cons. We’ll lay out the basics of each plan and offer advice on which is the best plan option.

Solo 401(k)

First up is the Solo 401(k) plan, also known as an Individual 401(k), One Participant 401(k) or Owner-Only 401(k). As the name implies, it’s a regular 401(k) that’s designed for one person. You may only choose a Solo 401(k) if you have self-employed income or have an owner-only business. Your business cannot have other full-time employees, other than a spouse.

One of the major benefits of the Solo 401(k), is the high contribution limits. For 2019, you can contribute up to $19,000 ($25,000 if age 50+) as the “employee”, known as an elective deferral. If you are familiar with workplace 401(k) plays, this is the same thing. On top of that, you can contribute to the plan as the “employer” as well, up to a total of $56,000 ($62,000 if age 50+).

You are also permitted to borrow up to $50,000 or 1/2 of the account balance, whichever is less. You can utilize the 401(k) loan for any reason: paying off debt, investing in a business, etc. The loan gets paid back at a lower interest rate, to yourself, into the 401(k) plan.

Another great feature is the Roth Solo 401(k) plan. You contribute to a Roth with after-tax funds, meaning you don’t get an upfront tax deduction, however, all qualified distributions from the plan are tax-free!

Lastly, if your plan administrator allows it, you can invest in anything the IRS does not deem prohibited. This includes real estate, precious metals and peer-to-peer lending. A Solo 401(k) facilitator that offers “checkbook control”, such as IRA Financial, gives you the freedom to make the types of investments you want, whenever you want to without having to ask for permission.


Next we’ll talk about the Simplified Employee Pension, or SEP IRA. A SEP is another popular choice among small businesses and the self-employed. It differs from a Solo 401(k) in that your business may have full-time employees other than yourself and spouse. It’s an easy plan to implement and administer year to year.

How does it work? A SEP works much the same as a traditional IRA, but with higher contribution limits. You may contribute up to the lesser of $56,000 for 2019 (there is no catch-up for those age 50 and older) or 25% of your compensation. (Rules differ slightly for self-employment income.)

You, as the employer, must contribute an equal percentage for yourself and all eligible employees. For example, if you want to contribute 10% for yourself, you must contribute 10% for each employee. Another great feature is that you don’t have to contribute every year. If you have a down year, you can skip the contribution altogether. This is a great incentive for your employees to do their jobs well!

Lastly, you can choose to “self-direct” your SEP IRA. Much the same as the Solo 401(k) with checkbook control, a Self-Directed SEP IRA allows you to invest in whatever you want with custodial consent. Again, you will need a facilitator that does not limit your investments choices.


Last up is the SIMPLE IRA, or Savings Incentive Match Plan for Employees. It’s not quite as “simple” as the name implies since you have different factors to consider. However, it’s a plan that makes sense for the self-employed. The SIMPLE IRA is a bit different from the other two options.

We’ll talk about contribution limits first, as they are drastically different than SEP IRAs and Solo 401(k) plans. For 2019, you may contribute up to $13,000, with a $3,000 catch-up contribution if you are at least age 50. Also, if an employee also contributes to another workplace plan, the total limit for all plan contributions is $19,000.

As the employer, you have two choices to contribute to the plan:

  1. Employer Matching Contributions
  2. Nonelective Contributions

If you choose to match contributions, you do so on a dollar for dollar basis, up to 3% of each employee’s salary. Note: you may choose to match less than 3% (but not less than 1%), but for no more than two out of five years. You must notify employees in a reasonable amount of time if you go this route.

Alternatively, you can opt for nonelective contributions. Instead of matching employee contributions, you can contribute 2% of each employee’s compensation (whether they choose to contribute to the plan themselves or not). The limit of compensation that is calculated is $280,000 for 2019.

All the other benefits of IRAs also apply to the SIMPLE plan. Tax-deferred savings, Self-Directed investment options and tax deductions are all features of the plan.

Two Last Plans to Consider

While the three plans mentioned above are designed for the self-employed or small business owner, you may also choose to invest with a traditional or Roth IRA. Anyone with earned income can contribute to an IRA. The major difference between the two is that traditional plans are funded with pre-tax money, meaning you get an immediate tax-deduction, but all withdrawals are taxed at ordinary income tax rates, while Roth IRAs are funded with after-tax money, meaning no tax deduction, however, all qualified withdrawals are tax-free.

The major drawback for regular IRAs are the contribution limits. You may only contribute up to $6,000 to an IRA in 2019. There is also a $1,000 catch-up for those at least age 50. This is significantly less than the other self-employed retirement plans.

Which Plan to Choose?

All things being equal, the Solo 401(k) plan is usually the best option for most self-employed individuals. It has many features that the other plans do not have. This includes the Roth option, the loan feature and higher contribution limits. The one time the Solo 401(k) should not be considered is when you know you are going to add full-time employees. If you expect your business is going to take off and the need to hire more staff is expected, then you should skip the Solo 401(k). You don’t want to start a plan and then have to abort soon after.

In that case, the next best option is the SEP IRA, simply because it allows for greater contributions than a SIMPLE IRA. However, you might prefer the employer contribution options of that plan. Who’s to say?


Since it’s the beginning of the year, financial goals, both old and new, are being looked at. If self-employment is on your horizon, you should make sure you have all the facts concerning self-employed retirement plans. Everyone’s situation is unique, so it’s best to speak with a retirement specialist that can work with you and your retirement goals. Give us a call at 800-472-0646 to speak with one of our experts that can help you decide what’s best for your specific situation.

Q for You

Which retirement plan are you considering if you are self employed?

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[10:44 PM] Valerie Marszalek-Boik