Self-employed retirement accounts work differently than employer plans

When you work for yourself, you don't have a company 401(k) or pension waiting for you. Instead, you choose from several account types designed specifically for self-employed people, and you contribute money yourself on a schedule you set. The main difference from a W-2 employee is that you fund both the employer and employee side of the contribution — but you also get tax deductions for what you put in, which lowers your taxable income for the year.

The account you pick depends on how much you earn, how much you want to save each year, and whether you have employees. A solo freelancer with $50,000 in annual income has different options than a small business owner with payroll. Starting early matters because the money you contribute has decades to grow, and the tax deduction you get each year is real money back in your pocket.

Key Takeaways

  • A SEP IRA or Solo 401(k) are the most common retirement accounts for self-employed people, and both let you contribute far more than a regular IRA.
  • You can deduct your retirement contributions from your business income, which reduces the taxes you owe that year.
  • You must set up your account by December 31 to make contributions for that tax year, though you can fund it until your tax filing important date.
  • If you have employees, a Solo 401(k) works only if you have no staff; a SEP IRA or Solo 401(k) with a payroll feature lets you cover employees too.
  • Your contributions reduce your self-employment tax, not just your income tax, which means the real savings are larger than the income tax rate alone.

SEP IRA: the simplest option for most solo business owners

A SEP IRA (Simplified Employee Pension) is the easiest retirement account to open and maintain if you work alone or have a very small team. You can contribute up to 25% of your net self-employment income, with a cap that changes each year (it was $69,000 in 2024, but check the current limit with your bank or accountant). You fund it once a year, usually by your tax filing important date, so there's no monthly or quarterly pressure.

The paperwork is minimal: you fill out a one-page form with your bank or brokerage, and you're done. You don't file any special tax forms with the IRS beyond your regular business return. If you hire employees later, you must contribute the same percentage of their salary that you contribute for yourself, which is why many people switch to a different account type once they have payroll.

You open a SEP IRA at any bank, credit union, or brokerage — the same places that offer regular IRAs. Ask them directly: "I want to open a SEP IRA for my self-employed business." They will walk you through it in one conversation.

Solo 401(k): higher contribution limits and more control

A Solo 401(k) (also called an individual 401(k)) lets you contribute more money than a SEP IRA if you have the income to support it. You can put in up to 100% of your compensation (capped at $69,000 in 2024 for employee deferrals, plus an additional employer contribution of up to 25% of net self-employment income). The total limit is much higher than a SEP IRA, making it the choice for high-earning freelancers and business owners.

The trade-off is paperwork. You'll file Form 5500 with the IRS if your account balance exceeds $250,000 at year-end, and the setup is more involved than a SEP IRA. However, a Solo 401(k) gives you the option to borrow against your balance (up to $50,000 or half the account, whichever is less) if you face a financial emergency — something you cannot do with a SEP IRA.

You can open a Solo 401(k) through most brokerages and some banks. Some providers charge annual maintenance fees ($100 to $300), while others waive fees if you keep a minimum balance. Compare a few before you choose.

How much you can contribute each year

Your contribution limit depends on your net self-employment income — the profit left after you pay business expenses. If you earn $100,000 in gross revenue but spend $40,000 on supplies and overhead, your net income is $60,000. That's the number you use to calculate how much you can set aside.

With a SEP IRA, you can contribute roughly 20% of net self-employment income (the exact percentage accounts for self-employment tax). With a Solo 401(k), you can contribute much more if your income supports it. Use an online calculator from your bank or brokerage to see your specific limit — they're free and take two minutes.

You don't have to contribute the same amount every year. In a good year, you might max out your account. In a slow year, you might contribute less or nothing at all. This flexibility is one reason self-employed people prefer these accounts to traditional pensions.

When to open your account and how to fund it

You must open your account by December 31 of the year you want to make contributions for. If you want to contribute for 2024, you need to set it up by December 31, 2024. However, you can fund the account (actually transfer the money in) until your tax filing important date, usually April 15 of the following year.

This timing matters because the contribution is deductible on your tax return for that year. If you open the account in January 2025 but fund it by April 15, 2025, the contribution counts toward your 2024 taxes. If you miss the December 31 important date, you cannot make a contribution for that year — you'll have to wait until the next year.

Set a calendar reminder for early December to open your account if you don't already have one. It takes 15 minutes online, and it locks in your ability to save for that tax year.

Self-employment tax savings: the hidden benefit

When you contribute to a retirement account, you reduce not just your income tax but also your self-employment tax. Self-employment tax covers Social Security and Medicare, and it's roughly 15.3% of your net income. A contribution that lowers your taxable income by $10,000 saves you about $1,530 in self-employment tax alone, plus your regular income tax on top of that.

This is different from a W-2 employee, whose employer pays half the payroll tax automatically. As a self-employed person, you pay both halves, so your tax savings from a retirement contribution are larger than they appear. A $10,000 contribution might save you $3,000 to $4,000 in total taxes, depending on your income level and state.

This is why even a modest contribution to a retirement account is worth doing: the tax savings pay for part of it when ready.

What happens if you have employees

If you hire staff, a Solo 401(k) stops working for you — the IRS defines it as an account for people with no employees. You'll need to switch to a SEP IRA (which requires you to contribute the same percentage for each employee as you do for yourself) or a straightforward IRA (which has lower contribution limits but lets employees contribute their own money).

Some business owners use a Solo 401(k) while they're solo, then switch to a SEP IRA once they hire their first employee. You can do this without penalty — just open the new account and stop funding the old one. Your existing balance stays where it is and continues to grow.

If you're thinking about hiring soon, ask your accountant or the brokerage which account makes sense for your timeline. The decision now can save you from switching accounts later.

Frequently Asked Questions

Can I have both a self-employed retirement account and a regular IRA?

Yes. You can contribute to a SEP IRA or Solo 401(k) and also to a traditional or Roth IRA in the same year. However, if you have a Solo 401(k), you cannot also contribute to a traditional IRA if your income exceeds certain limits — check with your accountant. The SEP IRA has no conflict with a regular IRA.

What if my income varies a lot from year to year?

Both account types let you contribute different amounts each year based on what you earn. In a high-income year, you can max out. In a low-income year, you can contribute less or skip a year entirely. This flexibility is one of the main reasons self-employed people use these accounts instead of fixed-contribution plans.

Can I withdraw money from my retirement account before retirement?

You can, but you'll pay income tax on the withdrawal plus a 10% penalty if you're under 59½. Some exceptions exist — hardship withdrawals, disability, or a loan against your Solo 401(k) balance. Talk to your accountant before you withdraw, because the tax bill can be substantial.

Do I need an accountant to set up a retirement account?

No. You can open a SEP IRA or Solo 401(k) yourself at any bank or brokerage in 15 minutes. However, an accountant can help you figure out which account fits your situation best and may support you're contributing the right amount. Many charge $100 to $300 for this conversation, which often pays for itself in tax savings.

What if I'm a contractor but also have a W-2 job?

You can open a Solo 401(k) or SEP IRA based on your self-employment income alone. Your W-2 employer's retirement plan doesn't prevent you from having your own. However, if your W-2 employer offers a 401(k), you may hit contribution limits across both accounts — check with your accountant to make sure you don't over-contribute.