Retirement Planning Strategies for the Self-Employed
Self-employment brings you freedom and flexibility, but you have to design your financial roadmap for retirement since there's no employer-provided plan. Self-employed people need to actively create their own retirement and investment plans since they don't have access to 401(k) plans at work.
In this article, we’ll address the key questions every self-employed professional should consider: This article covers everything self-employed professionals need to know about their retirement planning process, including who should plan, what options are available, and more.
Who Needs Retirement Planning When You’re Self-Employed?
This article is for all self-employed people who want to plan their retirement. As a freelancer, small business owner, or consultant, you don't have access to an employer-sponsored retirement program. The responsibility to place money aside for your future retirement therefore rests entirely with you.
Individual and Proprietor Business Tax Issues: If you operate a business by yourself, you need to create your own retirement plan.
Business Owners with a Spouse: Even if you’re the only employee, you may have the option to involve your spouse in your retirement strategy.
Business Growth: When you establish employment within your business, you should learn about the retirement plans that provide both financial benefits and employee retention.
What Are Your Retirement Plan Options?
To build a secure future, you must understand the different types of retirement plans available. The self-employed person has multiple retirement plan choices, including their own set of advantages for contribution limits along with tax benefits. Here’s a quick overview of the most popular choices:
1. Traditional or Roth IRA
The Best Choice for New Business Owners and People Moving from Traditional Employment. A contribution limit of $7,000 in 2024/2025 applies, except $8,000 at age 50 or better.
Tax Benefits:
Traditional IRA: You get tax benefits now when you make contributions, but when you withdraw money in retirement, you will face income taxation.
Roth IRA: After-tax contributions enable tax-free withdrawals after meeting qualified conditions.
Flexibility: Employees who work for you cannot participate in this plan, so they must create their own IRAs, except when you have an existing team.
2. Solo 401(k)
Best For: Self-employed people without employees (except perhaps a spouse) need this plan.
Annual Contribution Limit: $70,000 in 2025 with a $23,500 employee component plus additional employer contributions (catch-up contributions for people older than 50).
Contribution Limits: The plan allows high contribution limits, especially in years when you earn a high income.
3. SEP IRA (Simplified Employee Pension)
Eligibility: Self-employed people or those with small businesses without many employees should use this plan.
Sep IRA Annual Contribution or Deduct Limit: The lesser of $70,000 in 2025 or up to 25% of your net self-employment income, subject to compensation limits.
Tax Benefits: All your contributions are deductible from gross income, and the money stays tax-free until you decide to withdraw it at retirement age.
Considerations: Your plan requires all employees to be treated equally through percentage-based contributions, which might increase costs.
4. SIMPLE IRA (Savings Incentive Match Plan for Employees)
Eligibility: For businesses with up to 100 employees.
Annual Contribution Limit: A $16,500 annual limit in 2025 applies along with possible additional contributions for eligible participants.
Tax Benefits: These contributions are usually deductible, although distribution times apply.
Considerations: This plan requires employer matching contributions, making it more of a team benefit than a solo solution.
5. Defined Benefit Plan
This plan is recommended for high-income self-employed individuals who want to make significant retirement contributions.
Contribution Structure: Contributions are made based on your future pension payment amount together with your current age and projected investment gains.
Tax Benefits: These contributions are usually deductible, although distribution times apply.
Considerations: These plans require continuous funding and more administrative attention, which makes them suitable for people creating a clear retirement strategy.
Each plan has its own specific advantages and disadvantages. The selection depends on your present salary, your future needs during retirement, and whether you have staff now or plan to have staff in the future.
Where Should You Start Your Retirement Planning Journey?
You don’t need to make a perfect plan to begin your retirement preparations. The first step is to identify how much funding you need for retirement since this will help you understand how much you need to save.
Assess Your Needs: Identify your retirement financial resources needed along with inflation and longevity risks.
Consult a Professional: Contact a financial advisor or tax consultant with experience in retirement planning for self-employed individuals.
Choose Your Plan: Select the retirement account that best fits your financial situation and goals, whether you want an IRA, Solo 401(k), SEP IRA, SIMPLE IRA, or Defined Benefit Plan.
Set Up and Fund Your Account: You should open your selected account at a well-established brokerage firm or financial institution and then schedule standard periodic deposits.
By following these steps, you can start building a retirement strategy that leverages tax advantages and maximizes your savings potential.
When Should You Start Retirement Planning?
Because you are in business for yourself, every year counts. Your investments need time to grow and work efficiently through compounding when you start saving early. Although you currently operate from your beginning point through regular contributions regardless of their level, you will see significant growth over time.
Early Planning Pays Off: The power of investment returns demonstrates that initial contributions will grow significantly until your retirement date.
Adjust Contributions Over Time: Adjust your contribution amounts as your business expands together with increases in your financial resources.
Plan for Fluctuating Income: Self-employment often comes with variable income. Choose a plan that offers flexibility in your contributions during leaner months.
Why Is Retirement Planning Crucial for the Self-Employed?
Self-employed people must plan their retirements since there are no employer-sponsored plans to fall back on. Here’s why it’s so important:
Financial Independence: Through proper planning, you create a consistent revenue source post-retirement, which enables you to preserve your lifestyle despite being active or inactive.
Tax Advantages: Self-employed individuals gain tax benefits from these plans because they can take deductions for contributions and enjoy tax-deferred growth, which reduces their income during high-earning years.
Flexibility and Control: When you create your personal retirement plan, you gain control over saving amounts as well as contribution timing to match your business cash flow.
Mitigating Risks: The approach of only relying on business sales or one-time savings is dangerous. Through a retirement plan, you create a financial safety net that protects you from future market instabilities and provides stability over the long term.
Preparing for your retirement as a self-employed person means you maintain control of your financial path. Taking these proactive steps protects you against future income uncertainty, whether you operate your business or choose to work at a later date.
Ready to Secure Your Retirement?
Falcon Wealth Planning helps self-employed people create secure financial futures through retirement planning. Our team understands your special circumstances and offers guidance for retirement planning whether you choose an IRA, Solo 401(k), SEP IRA, SIMPLE IRA, or a Defined Benefit Plan.
Please contact us to set up a meeting and begin building your financial safety net. When you put an appropriate plan in place, you can maintain the freedom of running your own business while simultaneously securing your future financial stability for later years.
*The content in this blog is for general informational purposes only and does not constitute personalized financial, investment, tax, or legal advice. Falcon Wealth Planning, Inc., a fee-only, true fiduciary, registered investment advisor, provides this information to give a broad understanding of financial concepts and strategies.