Self Employed? You Need to Know about Your Retirement Advantage


When it comes to retirement, most Americans today have some form of defined-contribution plan for their retirement, typically through their employer. The most popular retirement plan today is probably a traditional 401(k) plan.

Self-employed Americans, on the other hand, don’t have an employer to sponsor a retirement plan for them. In some cases, they may work as independent contractors, or they may be the sole proprietor of their own business. In both of these situations, there’s no built-in retirement plan for them to take advantage of.

Though this might seem like a disadvantage at the outset, the truth is that self-employed people may have an unrecognized advantage when it comes to saving for their retirement. Here are a few of the options self-employed individuals have for retirement savings. You may find that they offer some extra benefits you can’t find in an employer-sponsored plan.

Options for Self-Employed Individuals

When you work for a company, you typically have just a few choices for retirement accounts—usually an employer-sponsored 401(k) or Roth 401(k). You can also open an individual retirement account (IRA) or Roth IRA on your own.

401(k) plans are generally a great deal, especially when your employer matches your contributions. However, both traditional and Roth IRAs come with income and contribution limits. This is especially true if you or your spouse also have an employer-sponsored 401(k) plan.

However, when you are self-employed or running a sole proprietorship as your own boss, you may have more retirement plan options. These are a few of the most common options for self-employed Americans.

home business

Solo 401(k)

If a 401(k) is what you are most interested in, no need to worry: there is a solo 401(k) option that is ideal for someone operating a sole proprietorship. Remember that employer matching contribution option with a traditional 401(k) plan? It still applies to the solo 401(k).

As sole proprietor, you can contribute to your solo 401(k) in a dual capacity, as both employer and employee. In your capacity as employee, you are allowed to contribute the same amount that you would be able to contribute under a traditional 401(k): up to $19,500 or $26,000 if you’re older than 50.

In addition to your contributions as an employee, you can contribute additionally as an employer. The limits for employer contributions depend on a somewhat complex formula; it’s advisable to work with an accountant or financial planner to help you  come up with the best contribution plan for your situation.  

The great part about a solo 401(k) is the flexibility. If you have a particularly good year, then you have the opportunity to put quite a bit away for your retirement. Conversely, in a bad year, you can hold back on your contributions.


Another option for self-employed people is the Simplified Employee Pension IRA (SEP IRA). SEP IRAs are quite simple to set up and continue operating, so they can be a good option for self-employed individuals or sole proprietors with a few employees.

With a SEP IRA, only an employer can make contributions, so you don’t have the dual capacity of the solo 401(k) allowing you to contribute in both capacities. With no annual funding requirement, you can skip a year if you need to, or contribute all at once at the end of the year. Your contribution limit is $57,000 or up to 25% of your net self-employed earnings.

Be aware that if you have employees and you contribute to your own SEP IRA, you will also have to contribute an equal percentage to each of your eligible employee’s plans that year as well. If your sole proprietorship starts adding employees and growing, that might end up costing you quite a bit extra.

Health Savings Accounts (HSA)

Though HSAs are intended as means of saving for medical expenses, they can also act as a retirement account if you choose. Contributions to HSAs are pre-tax and the money in them grows tax-deferred, like a 401(k) or an IRA. Though HSA funds are meant to be withdrawn for medical expenses, you are not required to use them for that purpose. Rather, you can let the money accrue year after year and eventually use it during your retirement if you so choose.

Withdrawals made in retirement for medical reasons are tax-free, but you’ll owe income taxes on withdrawals for non-medical purposes. In order to qualify to open an HSA, you must first be covered by a high-deductible health insurance plan. If you qualify, you can contribute up to a maximum of $7,100 per year for a family plan or $3,550 per year for an individual plan.

Remember: as a self-employed individual, you may have more flexibility for retirement savings than you think! Use these options as a starting point, and consult with a financial planner to find the best fit for you and your retirement needs.

Published by Robert Ryerson

A financial professional with more than three decades of experience, Robert Ryerson works closely with clients in the Freehold, New Jersey, area to meet their financial planning needs. As a Certified Financial Planner (CFP) at New Century Planning, he focuses on retirement income planning, as well as estate administration, regularly assisting his clients with legacy and estate planning. He also advises them on health and disability insurance, including Medicare, Medicaid, and Medicare Supplement Plans. Mr. Ryerson’s many years helping his clients navigate the complexities of retirement planning gave him a deeper understanding of the healthcare costs that retirees face. In 2013, he drew upon this knowledge to co-author the book What You Don’t Know About Retirement Will Hurt You. Outside of his work at New Century Planning, Robert M. Ryerson is a regular fixture at workshops and seminars on retirement. He has delivered several keynote speeches on the often-confusing topic of required minimum distributions. Mr. Ryerson continues to share his financial expertise as a facilitator of online courses for Certified Public Accountants through The Society for Financial Awareness. In the early 2010s, Mr. Ryerson became concerned about the threat of identity theft after noting the many cybersecurity breaches suffered by major companies. He became a Certified Identity Theft Risk Management Specialist (CITRMS) in 2014. He has since taught identity theft recovery courses at local community colleges. Mr. Ryerson also wrote a book on the topic entitled What’s the Deal with Identity Theft: A Plain English Look at Our Fastest Growing Crime. A graduate of Rutgers University with a degree in economics, Mr. Ryerson began his career in the financial services industry as a stockbroker. He obtained his CFP designation in 1991 and began working as an independent financial planner a few years later. In addition, he is a notary public.

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