Retirement Planning for Self-Employed Business Owners or Independent Contractors
- ashley5822
- May 14
- 3 min read
Written by Chad Conner, May 2025
As an independent contractor, you have several retirement plan options that can help you save for the future while offering tax advantages. Unlike traditional employees, you don’t have access to employer-sponsored plans, but you can still set up retirement accounts that give you control over your investments and contributions. Here are some popular retirement plan options for self-employed individuals:
1. Solo 401(k) (Individual 401(k) or Self-Employed 401(k))
Contribution Limits: As of 2024, you can contribute up to $23,000 ($30,500 if you're 50 or older) as an employee. As an employer, you can contribute an additional 25% of your net earnings, with total contributions capped at $69,000 ($76,500 if 50+).
Tax Advantages: Contributions are tax-deductible, and you can choose between traditional (pre-tax) or Roth (after-tax) contributions for the employee portion.
Best For: Those who want high contribution limits and are not planning to hire employees (other than a spouse).
2. SEP IRA (Simplified Employee Pension Individual Retirement Arrangement)
Contribution Limits: You can contribute up to 25% of your net self-employment earnings, with a maximum limit of $69,000 in 2024.
Tax Advantages: Contributions are tax-deductible, helping reduce your taxable income for the year.
Best For: Those with fluctuating income who want flexibility in contributions, and those who might employ others but want a straightforward plan.
3. SIMPLE IRA (Savings Incentive Match Plan for Employees IRA)
Contribution Limits: In 2024, you can contribute up to $16,000 ($19,500 if 50+). Employers are required to match employee contributions up to 3% of net earnings or make a fixed 2% contribution.
Tax Advantages: Contributions are tax-deductible, lowering your taxable income.
Best For: Self-employed individuals with consistent income who may have employees and want a simple, low-cost plan.
4. Traditional or Roth IRA
Contribution Limits: The 2024 contribution limit is $7,000 ($8,000 if 50 or older).
Tax Advantages:
Best For: Independent contractors who want a simple option or are already contributing to a larger retirement account but want to diversify.
5. Defined Benefit Plan
Contribution Limits: Contribution amounts vary based on factors like age, income, and desired retirement benefits. Contribution limits are generally high, allowing for significant savings if your income is substantial.
Tax Advantages: Contributions are tax-deductible, and the plan offers predictable retirement income.
Best For: High-income earners who want to maximize retirement savings and can commit to funding the plan consistently.
Other Considerations
Health Savings Account (HSA): If you have a high-deductible health plan (HDHP), you may also contribute to an HSA, which can provide triple tax benefits (tax-free contributions, tax-free growth, and tax-free withdrawals for medical expenses). HSAs are often seen as a supplementary retirement savings tool.
Tax Planning: Since independent contractors pay both employer and employee portions of Social Security and Medicare taxes, the tax deductions from retirement contributions can help offset these costs.
This information is not intended to be a substitute for specific individualized tax advice. We suggest that you discuss your specific tax issues with a qualified tax advisor.
[1] Contributions to a traditional IRA may be tax deductible in the contribution year, with current income tax due at withdrawal. Withdrawals prior to age 59 ½ may result in a 10% IRS penalty tax in addition to current income tax. (157-LPL)
[2] A Roth IRA offers tax deferral on any earnings in the account. Qualified withdrawals of earnings from the account are tax-free. Withdrawals of earnings prior to age 59 ½ or prior to the account being opened for 5 years, whichever is later, may result in a 10% IRS penalty tax. Limitations and restrictions may apply.
