Self-Employed? Here's How to Build a Tax-Advantaged Retirement Plan That Works for You

Running your own business comes with freedom, flexibility, and unlimited potential, but it also means you’re solely responsible for your financial future.  

Unlike traditional employees, self-employed individuals don’t have an employer-sponsored 401(k) or pension plan waiting for them. Instead, they must create their own path to long-term retirement savings.  

The good news? There are powerful self-employed retirement plans available that offer tax-advantages, higher contribution limits, and flexibility for small business owners, freelancers, and sole proprietors.  

With the right strategy, you can build a retirement plan that protects your lifestyle, optimizes taxes, and grows your wealth over time.  

Below, we’ll walk through the basics of self-employed retirement planning, how much you should aim to save, and the most common retirement plan options to consider.  

Step 1: Set a Retirement Savings Goal  

Before you choose a retirement account, start with a clear goal. How much money will you need in retirement to support your lifestyle?  

A common rule of thumb is that you’ll need about 80% of your pre-retirement income, which you can pair with the “4% rule” to estimate withdrawals from your portfolio.  

For example, if you earn $250,000, you might target $200,000 in annual retirement income. Using the 4% rule, that translates into $5 million in retirement savings.  

But rules of thumb often oversimplify. A better approach is to build a financial plan with realistic assumptions about your savings rate, investment returns, and spending needs. Tools like Monte Carlo simulations can model thousands of scenarios to show the probability of success, helping you make informed choices.  

Working with a financial advisor can refine these projections and factor in strategies like tax-deductible contributions, Roth IRA conversions, or defined benefit plans for high-income individuals.  

Step 2: Choose the Best Retirement Plan for the Self-Employed  

Once you have your savings goal, the next step is selecting the right account(s). The IRS offers several retirement plan options for self-employed people, each with unique benefits, contribution limits, and rules for withdrawals.  

Here are the most common self-employed retirement accounts:  

1. Solo 401(k) / One-Participant 401(k)

A solo 401(k), sometimes called a self-employed 401(k), is ideal for sole proprietors with no employees other than a spouse.  

• Contributions: You can contribute as both employer and employee. In 2025, employee contributions are capped at $23,000, plus a $7,500 catch-up contribution if you’re 50 or older.  

• Employer contributions: You can also contribute up to 25% of your net self-employment income, with total contributions capped at $69,000 (or $76,500 with catch-up contributions).  

• Advantages: High contribution limits, flexible deferrals, and both traditional (pre-tax) and Roth (tax-free growth) options.  

• Considerations: Adding eligible employees (non-spouse) requires transitioning to a full employer-sponsored 401(k).  

This plan is a favorite for high-income freelancers and business owners seeking maximum tax advantages. 

2. Simplified Employee Pension (SEP IRA)

A SEP IRA is one of the simplest self-employed retirement plans.  

• Contributions: Employers (including sole proprietors) can contribute up to 25% of compensation or $69,000 in 2025, whichever is lower.  

• Eligible employees: If you have staff, you must contribute the same percentage of pay for every eligible employee.  

• Advantages: Flexible funding—you can contribute heavily during profitable years and skip contributions in leaner ones.  

• Considerations: Only employer contributions are allowed; no employee deferrals. Contributions are tax-deductible, but withdrawals are taxable.  

This plan works well for self-employed individuals with fluctuating income or sole proprietors who want flexibility. 

3. Savings Incentive Match Plan for Employees (SIMPLE IRA)

A SIMPLE IRA plan is designed for small business owners with 100 or fewer employees.  

• Employee contributions: Up to $16,000 in 2025, with an additional $3,500 catch-up contribution for those 50 or older.  

• Employer contributions: Required to match up to 3% of pay or contribute 2% for all eligible employees, even if they don’t participate.  

• Advantages: Lower administrative burden than a 401(k).  

• Considerations: Lower contribution limits than a solo 401(k) or SEP IRA. Early withdrawals within the first two years face a steep 25% penalty.  

This option is a good fit if you want a straightforward plan with some level of employee contributions. 

4. Defined Benefit Plans (Cash Balance Plans)

A defined benefit plan, such as a cash balance pension plan, is best for high-income self-employed people who want to maximize tax-deferred savings.  

• Contributions: Contribution limits are much higher than other plans and increase with age—potentially over $300,000 annually for older business owners.  

• Advantages: Significant tax deductions, predictable growth, and a way to accelerate retirement savings late in your career.  

• Considerations: Requires actuarial calculations, mandatory employer contributions, and higher administrative costs.  

This plan works best for professionals with consistent self-employment income (doctors, lawyers, consultants) seeking large tax-deductible contributions. 

5. Traditional IRA and Roth IRA

If you prefer a straightforward individual retirement account, both the traditional IRA and Roth IRA remain options for the self-employed.  

Contribution limits: In 2025, you can contribute up to $7,000 annually, or $8,000 with catch-up contributions.  

Traditional IRA: Contributions may be tax-deductible depending on your income limits and tax return status. Growth is tax-deferred, but withdrawals are taxable.  

Roth IRA: Contributions are made with after-tax dollars, but qualified withdrawals in retirement are tax-free. Income limits apply based on your modified adjusted gross income (MAGI).  

These accounts are often used alongside other plans to add tax flexibility. 

6. Health Savings Account (HSA)

While not a retirement account in the traditional sense, an HSA can play a dual role for self-employed individuals with high-deductible health plans.  

• Contribution limits: In 2025, you can contribute up to $4,300 for individuals or $8,550 for families, plus a $1,000 catch-up if you’re 55 or older.  

• Advantages: Contributions are tax-deductible, funds grow tax-deferred, and qualified withdrawals for medical expenses are tax-free. After age 65, withdrawals for nonmedical expenses are taxed like a traditional IRA.  

For many small business owners, an HSA is a hidden gem that combines healthcare and retirement planning.  

Next Steps: Build Your Self-Employed Retirement Strategy  

When you’re self-employed, saving for retirement takes discipline, but the rewards are substantial. By choosing the right mix of retirement accounts, you can take advantage of tax benefits, build long-term wealth, and secure your financial independence.  

Whether you’re just starting your own business or you’re a high-income professional ready to maximize contributions, the best strategy is personalized. 

A financial advisor or tax professional can help you evaluate contribution limits, tax advantages, and plan design to fit your long-term goals.  

At Plancorp, we not only help business owners with personal wealth management, but also have teams dedicated to guiding your company's retirement plans and helping you craft a succession plan that will provide lasting financial freedom. A Private Strategy Session with one of our wealth advisors is a great place to start.