Background and why plan choice matters
Freelancers and small business owners don’t have access to an employer-sponsored plan in the same way many W-2 employees do. That reality means they must choose a retirement vehicle that fits three things: cash-flow variability, tax goals (current deduction vs. tax-free growth), and administrative bandwidth. Over the last 15 years advising independent professionals, I’ve seen the best outcomes come from a simple decision framework: (1) pick a plan you can fund consistently, (2) prioritize tax efficiency, and (3) reassess annually as income and team size change.
Key account types (how each works and who it’s best for)
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Individual Retirement Accounts (IRAs)
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What they are: Personal retirement accounts you can open at most brokerages and custodians. They come in two primary tax flavors: Traditional (pre-tax contribution or tax-deductible, tax-deferred growth) and Roth (after-tax contribution, tax-free qualified withdrawals).
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Who benefits: Individuals with lower administrative needs and those who want a straightforward, low-cost way to save. Roth IRAs are especially useful for younger freelancers who expect their tax rate to rise.
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Practical notes: Contribution limits are adjusted annually; for planning, confirm the current limit on the IRS site. IRAs have income-based rules for Roth eligibility and deduction phases for Traditional IRAs when you (or a spouse) are covered by a workplace plan (IRS: Retirement Plans FAQs Regarding Participant Contributions).
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SEP IRA (Simplified Employee Pension)
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What it is: An employer-funded IRA that is easy to set up and administer. Primarily funded by the business owner for themselves and — if you have employees — for eligible employees too.
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Who benefits: Sole proprietors or small-business owners who want high, flexible employer contributions without the year-by-year required employer matching that a SIMPLE plan requires.
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Practical notes: Contributions are based on a percentage of compensation, so adding employees increases the owner’s required contributions to those employees. Use SEP when you want higher potential employer-side contributions and minimal annual paperwork. See our deeper comparison: Choosing Between a SEP IRA and Solo 401(k) for Small Business Owners (finhelp.io).
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Solo (One-Participant) 401(k)
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What it is: A 401(k) for business owners with no employees other than a spouse. It lets the owner contribute both as an employee (elective deferral) and as an employer (profit-sharing), often resulting in higher total contribution capacity than a straight employer-only plan.
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Who benefits: High-earning sole proprietors and owners who want to maximize retirement savings and, potentially, take loans from the plan (if the plan document allows loans).
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Practical notes: Solo 401(k)s require plan setup and some annual reporting once plan assets exceed certain thresholds. If you expect to hire employees, a Solo 401(k) can become impractical because it’s only for one-participant businesses. For more on tradeoffs, see Retirement Savings Options for the Self-Employed: SEP, SIMPLE, and Solo 401(k) (finhelp.io).
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SIMPLE IRA (Savings Incentive Match Plan for Employees)
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What it is: A low-cost, straightforward employer-sponsored plan for small employers (generally fewer than 100 employees) that mandates employer contributions (either a match or a fixed contribution).
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Who benefits: Small businesses that want an easy-to-manage plan and are willing to commit to employer contributions each year.
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Practical notes: SIMPLE rules require employers to make either a matching contribution (up to a set percent) or a fixed non-elective contribution for all eligible employees. Plan choice should consider whether you need predictable employer tax deductions and how you intend to recruit and retain employees.
Comparing costs, contributions, and administration
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Administrative burden: IRAs (Traditional/Roth) are the lightest. SEP IRAs are also light. SIMPLE IRAs have employer obligations but minimal filings. Solo 401(k) offers the highest contribution potential but requires more setup and, in some circumstances, annual IRS filings (Form 5500) once assets exceed thresholds.
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Contribution strategy and tax impact: Choose Traditional or pre-tax contributions if you need current-year tax deductions. Choose Roth if you can pay taxes now and want tax-free withdrawals. Employer contributions (SEP/SIMPLE/Solo employer share) are generally tax-deductible to the business; employee elective deferrals reduce individual taxable income.
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Hiring employees: Hiring changes the calculus. SEP requires equal percentage contributions to eligible employees; SIMPLE requires employer contributions for eligible employees; Solo 401(k) is only for businesses without non-spouse employees. Expect to re-evaluate plan choice when hiring.
Real-world decision checklist (use this to pick a plan)
- Do you have employees (other than a spouse)?
- No: Solo 401(k) or SEP IRA are strong candidates. Solo 401(k) often wins if you want to maximize contributions and possibly access loan provisions. SEP works well when you want employer-only contributions with minimal setup.
- Yes: SIMPLE IRA or SEP IRA may be better. Think through whether you want predictable matching (SIMPLE) or flexible employer contributions (SEP).
- How stable is your income?
- Stable and high: Solo 401(k) gives the highest combined employee+employer contribution power.
- Variable: SEP allows flexible annual contributions; Roth IRAs offer long-term tax-free growth when you expect future income increases.
- How much administrative work can you tolerate?
- Minimal: IRA or SEP.
- Willing to manage forms/records: Solo 401(k) or SIMPLE.
Tax and compliance essentials to watch
- Contribution limits change annually: Always verify the current-year limits on IRS pages before funding accounts. (IRS retirement plan resources: https://www.irs.gov/retirement-plans)
- Employer vs. employee definitions: For tax and reporting, know who counts as an employee and which compensation is plan-eligible.
- Self-employment tax and SE income calculations: Contributions that depend on net business profit must account for self-employment tax and adjustments; use a tax professional to calculate allowable employer contributions.
- Required Minimum Distributions (RMDs): Traditional plans require RMDs after a certain age (rules changing in recent years), while Roth IRAs generally do not require RMDs during the owner’s lifetime—confirm current rules on the IRS site.
Practical tips I use with clients
- Automate what you can: Set up automatic transfers sized for an annual goal rather than trying to time contributions around irregular invoices.
- Keep a ‘‘contribution reserve’’: Because freelancers have variable income, keep a small cash buffer earmarked for employer contributions when required (e.g., for SIMPLE or SEP plans).
- Revisit plan choice annually: A plan that is right at $80k net income may not be optimal at $200k or if you hire employees. I advise clients to review plan choice during annual tax planning meetings.
- Consider Roth via conversion strategies: If you expect lower income years or you plan to use a backdoor Roth strategy, coordinate with a tax advisor. See our guide on Backdoor Roth IRAs (finhelp.io) for implementation pitfalls.
Common mistakes to avoid
- Choosing a plan only on contribution limits without considering payroll and reporting burden.
- Forgetting to fund employer contributions for employees on time, which can create corrective distribution complexity.
- Mixing up Roth eligibility and contribution phase-outs—verify income rules each year.
Resources and authoritative references
- IRS — Retirement Plans FAQs Regarding Participant Contributions: https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-participant-contributions
- IRS — Retirement Plans for Small Businesses (SEP, SIMPLE, and Qualified Plans): https://www.irs.gov/retirement-plans/retirement-plans-for-small-businesses
- Consumer Financial Protection Bureau — Retirement planning basics for independent workers: https://www.consumerfinance.gov
Professional disclaimer
This article is educational and not individualized financial or tax advice. Rules, contribution limits, and tax treatment change regularly; consult a CPA or a qualified financial advisor before implementing or changing a retirement plan.
If you’d like help comparing a SEP versus Solo 401(k) for your specific situation, or a step-by-step setup walkthrough, I recommend reviewing our comparison page Choosing Between a SEP IRA and Solo 401(k) for Small Business Owners (https://finhelp.io/glossary/choosing-between-a-sep-ira-and-solo-401k-for-small-business-owners/) and the broader primer Retirement Savings Options for the Self-Employed: SEP, SIMPLE, and Solo 401(k) (https://finhelp.io/glossary/retirement-savings-options-for-the-self-employed-sep-simple-and-solo-401k/).
