Quick overview
Transitioning from an employer-sponsored plan to self-employment changes how you save, but it doesn’t have to reduce your retirement progress. Self-employed savers can use dedicated plans (Solo 401(k), SEP IRA, SIMPLE, Traditional or Roth IRA and other employer plans where eligible), choose tax treatment that fits your goals, and adapt contribution timing to match variable cash flow. The key priorities: pick the right plan for your business structure, understand contribution rules and deadlines, and keep disciplined saving and recordkeeping.
(For plan-by-plan details, see the FinHelp guides to Solo 401(k) and SEP IRA.)
- Solo 401(k): https://finhelp.io/glossary/solo-401k/
- SEP IRA: https://finhelp.io/glossary/sep-ira/
Sources: IRS guidance on small-business retirement plans and filing rules (see IRS publications and Form 5500-EZ for one-participant plans) and CFPB retirement resources. (IRS; Consumer Financial Protection Bureau)
Which retirement plans are best for the self-employed?
That depends on your business type, how many people you employ, and whether you want employee-deferral flexibility or simple employer-only contributions.
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Solo 401(k). Best for sole proprietors or single-owner LLCs with no full-time employees (other than a spouse). Lets the owner make employee deferrals and employer profit-sharing contributions. Can include a Roth option for employee deferrals at some providers. If the plan grows past the IRS asset threshold for single-participant plans, a Form 5500-EZ filing obligation may apply (see IRS guidance).
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SEP IRA. Easy to set up and inexpensive to administer. Contributions are employer contributions only, based on a percentage of earned income; the employer deducts them on the business return. SEP IRAs are flexible year-to-year—useful when income is irregular.
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SIMPLE IRA. Works for small employers with employees; easier and cheaper than a 401(k) but has contribution and matching rules that differ from SEP and Solo 401(k).
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Traditional and Roth IRA. Useful even when you also use an employer-based plan. Roth IRAs offer future tax-free withdrawals (subject to rules); income limits apply to Roth contributions.
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Other options. If you run a larger business or have employees, consider a traditional 401(k) with payroll deferrals or other qualified plans. Keogh and defined-benefit plans still exist for certain businesses but require specialized setup and ongoing administration.
(For a broad planning guide, see FinHelp’s Retirement Planning for Self-Employed Professionals.)
Link: https://finhelp.io/glossary/retirement-planning-for-self-employed-professionals/
How do contribution mechanics and tax benefits work?
A few consistent rules govern contributions across plan types:
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Who contributes. Some plans allow both an “employee” role (elective deferral) and an “employer” role (profit-sharing or employer contribution). Solo 401(k)s commonly use both. SEPs are employer-only contributions.
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Limits change yearly. The IRS sets annual limits and definitions (e.g., elective deferral limit, annual addition limit, percent-of-compensation limits). These numbers are indexed and can change. Always check the current IRS limits before planning contributions (IRS Publication 560 and plan notices).
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Tax treatment. Employer contributions to SEP or to the employer portion of a Solo 401(k) are generally deductible on the business tax return. Traditional plan contributions reduce current taxable income and grow tax-deferred. Roth contributions (available for some Solo 401(k)s and Roth IRAs) are made with after-tax dollars and can produce tax-free withdrawals in retirement if rules are met.
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Deadlines. Employee deferrals generally must be made by year-end. Employer contributions (SEP or employer portion of a Solo 401(k)) are deductible for the tax year and can typically be made by the business’s tax-filing deadline, including extensions. Confirm deadlines with your tax advisor and plan provider.
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Reporting. If a one-participant plan exceeds the IRS filing threshold for plan returns, you may need to file Form 5500-EZ. See IRS instructions for filing requirements.
Sources: IRS plan publications and forms; consult your tax professional for deadlines and filing specifics (IRS Form 5500-EZ filing rules).
Practical steps to keep saving when income is irregular
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Build a short-term cushion. Before making large contributions, maintain an emergency fund of 3–6 months (or more, for highly variable income). This reduces the chance you’ll need to withdraw retirement funds during downturns.
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Automate the basics. Set up automatic transfers to a low-cost IRA or to a business checking account designated for retirement contributions. Even modest, regular contributions compound over time.
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Use flexible plans when appropriate. A SEP IRA lets you adjust employer contributions each year based on profitability. That flexibility can preserve cash while keeping the retirement plan intact.
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Mix accounts. If possible, use both an IRA (Traditional or Roth) for guaranteed annual contributions and a Solo 401(k) or SEP for larger, tax-deductible employer contributions in profitable years.
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Prioritize tax-advantaged savings over taxable investments when you have limited spare cash, unless you need liquidity for short-term business expenses.
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Revisit contribution levels quarterly. Align contributions with a rolling 12-month income forecast rather than a fixed annual amount.
How to choose between Solo 401(k) vs SEP IRA vs other plans
Consider these practical points rather than headline contribution limits alone:
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Administrative complexity. Solo 401(k)s may require more paperwork if you want loans or Roth features. SEPs are minimal admin.
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Employee situation. If you have employees, a Solo 401(k) is not appropriate; a SEP or employer 401(k) may be better depending on whether you want to make employer-only contributions or elective deferrals.
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Contribution flexibility. SEPs allow discretionary employer contributions each year; Solo 401(k)s permit employee deferrals (if you want to defer a portion of your compensation) plus employer profit-sharing.
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Roth options and loans. If you want Roth-style contributions or in-plan loan capability, a Solo 401(k) is more likely to provide those features.
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Cost-benefit. Compare provider fees, trading costs, and services offered. Cheaper custodians may have limited investment options; premium providers can offer better advice and recordkeeping.
Recordkeeping, tax reporting and compliance essentials
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Track compensation. For contribution calculations you’ll need accurate earned income figures (net self-employment income after business deductions and adjustments for self-employment tax where applicable).
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File required forms. Keep copies of contribution records, plan documents, and any Form 5500-EZ filings. If you hire employees or add participants, plan documents and nondiscrimination testing rules can become relevant.
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Keep a contributions calendar. Note year-end deadlines for elective deferrals and tax-filing deadlines (including extensions) for employer contributions.
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Use professionals when plan complexity grows. When you have employees or cross the plan-size reporting threshold, a CPA or ERISA attorney helps avoid costly compliance mistakes.
Source: IRS small-business retirement plan guidance; see Form 5500-EZ instructions.
Tax planning and coordination with business taxes
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Employer contributions are generally deductible. Employer-side contributions lower business taxable income. That makes SEP and employer profit-sharing attractive for high-income years.
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Self-employment tax interplay. Retirement contributions typically don’t reduce the self-employment tax base in the same way they reduce income tax; consult your tax advisor for exact calculations.
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Roth vs pretax. If you expect higher tax rates in retirement, Roth contributions (when available and if you qualify by income) can be a smart long-term tax hedge. If you need current-year tax relief, prioritize pretax employer and traditional contributions.
Common mistakes to avoid
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Skipping retirement to save for the business. Building a business and your retirement can be parallel goals; prioritize a minimum consistent contribution.
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Ignoring deadlines and filing requirements. Missed plan filing or contribution deadlines can create complications and lost tax benefits.
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Overcommitting during a good year. Don’t fund to the maximum if it will leave you short of operating capital or emergency reserves.
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Failing to verify provider terms. Some custodians have limits on in-plan Roth conversions or loan features; get plan rules in writing.
Action checklist (first 90 days after becoming self-employed)
- Decide whether you will roll an employer plan (401(k) or other) into an IRA or keep it where it is. Rolling to an IRA often simplifies administration and preserves tax advantages.
- Open the appropriate account (IRA, Solo 401(k), or SEP IRA) with a reputable custodian.
- Set up automatic transfers for at least a small, regular contribution.
- Document contribution policy and keep an easy-to-access file for tax reporting.
- Schedule a quarterly review to adjust contributions based on revenue.
Example scenarios (percent-based, not dollar-dependent)
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Low-first-year revenue freelancer: maintain a larger cash reserve, contribute a small automatic IRA transfer each month, and plan for SEP or Solo 401(k) contributions only if the year finishes profitably.
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Growing consulting practice: take an employee deferral into a Solo 401(k) up to a comfortable percent of income, add employer profit-sharing in profitable years, and convert a portion to Roth over time if tax circumstances permit.
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Owner who hires staff: consider a SEP or employer 401(k) to treat employees fairly and maintain tax deductions while balancing business cash flow.
Where to learn more
- IRS Publication 560, Retirement Plans for Small Business (for SEP, SIMPLE, and qualified plans) — check the IRS website for current-year limits and rules.
- IRS Form 5500-EZ instructions for one-participant plans.
- Consumer Financial Protection Bureau retirement resources for individual savers.
FinHelp internal resources: Solo 401(k) and SEP IRA glossary pages linked above for plan-specific mechanics and provider comparisons.
Professional disclaimer: This article is educational and not individualized tax or investment advice. Plan rules and IRS limits change. Consult a CPA or qualified financial planner familiar with self-employed tax and retirement rules before making plan elections or contributions.
Author note: In my 15 years advising self-employed clients, the most consistent outcome comes from combining a conservative emergency fund with automated, regular retirement contributions and a plan that fits the business’s size and payroll reality. Start small, stay consistent, and re-evaluate annually.