Retirement plans for self-employed individuals offer contribution limits that far exceed what a standard IRA or even a typical employer-sponsored 401(k) allows. If you earn income from freelancing, consulting, contracting, or running your own business, you have access to powerful tax-advantaged accounts that most W-2 employees never see. The key is understanding which plan fits your income level, your goals, and how much administrative work you are willing to take on.
Whether you work for yourself full-time or earn self-employment income on the side, setting up the right retirement plan can reduce your current tax bill while building long-term wealth. Below is a breakdown of the best retirement plans for self-employed workers, including how each one works, who it suits best, and current contribution limits. Because each plan carries different deduction timing and compliance rules, many business owners pair these decisions with professional tax advisory services before they commit.
How a solo 401(k) works for self-employed individuals
A solo 401(k), sometimes called an individual 401(k), is one of the most popular retirement plans for self-employed people with no full-time employees other than a spouse. It allows you to contribute in two roles: as both the employer and the employee.
On the employee side, you can defer up to $23,500 of your earned income in 2025. If you are age 50 or older, you can add a catch-up contribution of $7,500, bringing your employee deferral to $31,000. On the employer side, you can contribute up to 25% of your net self-employment earnings. The combined total of employee and employer contributions cannot exceed $70,000 for 2025 (or $77,500 with the age-50 catch-up).
The solo 401(k) self-employed plan stands out because it allows both salary deferrals and profit-sharing contributions. This dual structure means you can shelter a higher percentage of your income than most other plans, especially if your earnings are moderate. For example, someone earning $80,000 in net self-employment income could potentially contribute over $40,000 in a single year.
Another advantage is the option to make Roth contributions. Many solo 401(k) providers allow you to designate your employee deferrals as Roth, meaning you pay taxes now but withdraw the money tax-free in retirement. You can also take loans from a solo 401(k) if your plan document permits it, which is not possible with a SEP IRA.
The trade-off is paperwork. Once your plan assets exceed $250,000, you must file Form 5500-EZ annually with the IRS. You also need to establish the plan by December 31 of the tax year you want to contribute for, though you can make contributions up to your tax filing deadline, including extensions. The IRS outlines these rules in its guidance on one-participant 401(k) plans.
What is a SEP IRA and who should use one?
A Simplified Employee Pension IRA, commonly called a SEP IRA, is a defined contribution plan that works similarly to a profit-sharing arrangement. The SEP IRA self-employed option is attractive because it is one of the easiest retirement plans to set up and administer. There is no annual filing requirement, and most brokerages offer SEP IRAs with no setup fees. The IRS Simplified Employee Pension Plan overview details the eligibility and contribution rules.
With a SEP IRA, you contribute as the employer only. The maximum contribution for 2025 is 25% of your net self-employment earnings, up to $70,000. There is no employee deferral component, which means you cannot make salary reduction contributions the way you can with a solo 401(k).
This plan is a strong fit for self-employed individuals who want simplicity above all else. If you do not need Roth contributions, do not want to deal with plan documents, and prefer a “set it and forget it” approach, a SEP IRA may be your best option. It is also useful for higher earners who can maximize the 25% employer contribution without needing an employee deferral to reach their savings goal.
One important consideration: if you have employees who meet certain eligibility requirements (generally those who are at least 21, have worked for you in three of the last five years, and earned at least $750), you must include them in the plan and contribute the same percentage of their compensation as you contribute for yourself. This can make a SEP IRA expensive if you have a growing team.
Unlike a solo 401(k), you can establish a SEP IRA after the end of the tax year. You have until your tax filing deadline, including extensions, to both set up the plan and make contributions. This flexibility makes it a popular last-minute tax planning tool.
Profit-sharing plans for self-employed business owners
A profit-sharing plan is a defined contribution retirement plan that allows discretionary employer contributions. As a self-employed person, you act as both the employer and the employee, giving you full control over how much to contribute each year.
The maximum deductible contribution to a profit-sharing plan is 25% of your net self-employment earnings, up to $70,000 for 2025. Contributions are not mandatory in any given year, so you can adjust your savings based on how your business performs. In a strong year, you contribute more. In a lean year, you scale back or skip entirely.
Profit-sharing plans offer more flexibility in plan design than a SEP IRA. You can incorporate vesting schedules, allocate contributions using different formulas, and even add a 401(k) feature. Adding a 401(k) arrangement to a profit-sharing plan effectively turns it into a solo 401(k), giving you access to both employee deferrals and employer profit-sharing contributions.
To make contributions for a given tax year, the plan must be established by December 31 of that year. However, you can make the actual contributions up to your tax return due date, including extensions. This gives you time to calculate your exact net earnings before committing to a contribution amount.
When a defined benefit plan makes sense for self-employed earners
A defined benefit plan is the only retirement plan that sets a target future pension benefit and then calculates the contributions needed to reach that target. For high-earning self-employed individuals, a defined benefit plan self-employed arrangement can allow contributions that dwarf what any defined contribution plan permits.
The maximum annual benefit payable from a defined benefit plan is $280,000 for 2025 (or 100% of your average compensation for the highest three consecutive years, if less). Because the plan is actuarially driven, the annual contribution required to fund that future benefit depends on your age, investment returns, and how many years remain until retirement. Older business owners who start a defined benefit plan close to retirement age may be able to contribute $200,000 or more per year. The IRS defined benefit plan overview explains how these benefit limits and funding requirements work.
This type of plan is best suited for self-employed professionals with consistently high income, such as physicians, attorneys, consultants, and successful business owners earning well above $250,000 annually. The contributions are fully tax-deductible, which can produce dramatic tax savings in high-income years.
The downsides are real. Defined benefit plans require annual actuarial calculations, which means you will need to hire an actuary or use a third-party administrator. Annual contributions are generally mandatory once the plan is in place, so you need predictable income to sustain the commitment. Administrative costs are higher than any other self-employed retirement plan.
To claim a deduction for a given tax year, the plan must exist by December 31 of that year, and contributions must be made by your return due date, including extensions.
How to choose the best retirement plan for your situation
Selecting among these retirement plans for self-employed individuals depends on several factors: your income level, your age, whether you have employees, and how much complexity you are willing to manage.
If you want maximum contributions with moderate complexity, the solo 401(k) is usually the strongest choice. It offers the highest contribution potential at most income levels thanks to its dual employer-employee structure, plus optional Roth contributions and loan provisions.
If you prioritize simplicity and have no employees, a SEP IRA is hard to beat. It takes minutes to set up, has no annual filing requirements, and lets you contribute up to 25% of net earnings with minimal paperwork.
If you earn a high income consistently and want to shelter as much as possible from taxes, a defined benefit plan allows contributions that no other plan can match. Just be prepared for the ongoing administrative costs and mandatory annual contributions.
You can also combine plans. For example, a solo 401(k) paired with a defined benefit plan can let you save even more aggressively. Consult a tax advisor or financial planner to determine which combination works best for your specific income and goals. Coordinating retirement contributions with your broader accounting services and entity structure often reveals additional savings beyond the contribution itself.
Key considerations when you have employees
Adding employees changes the equation for every self-employed retirement plan. Generally, eligible employees must be allowed to participate in any plan you establish, and contributions on their behalf can significantly increase your costs.
With a SEP IRA, you must contribute the same percentage of compensation for each eligible employee as you contribute for yourself. A solo 401(k) is only available if you have no employees other than your spouse. Profit-sharing plans and defined benefit plans allow employee participation but involve more complex administration, testing, and compliance requirements.
Before choosing a plan, evaluate your current and expected headcount. If you plan to hire, factor in the cost of employee contributions and administrative overhead when comparing your options.
Frequently Asked Questions
How much can a self-employed person contribute to a retirement plan?
The amount depends on the plan type. A solo 401(k) allows up to $70,000 in combined employee and employer contributions for 2025 ($77,500 if you are 50 or older). A SEP IRA permits up to 25% of net self-employment income, also capped at $70,000. A defined benefit plan can allow even higher contributions based on actuarial calculations and your age.
What is the difference between a SEP IRA and a solo 401(k)?
A SEP IRA only allows employer contributions (up to 25% of net earnings), while a solo 401(k) lets you contribute as both employer and employee. The solo 401(k) typically allows larger total contributions at lower income levels and offers Roth and loan options that a SEP IRA does not. A SEP IRA is simpler to set up and has no annual filing requirement.
Can I set up a retirement plan after the end of the tax year?
Yes, for a SEP IRA. You can establish and fund a SEP IRA up to your tax filing deadline, including extensions. A solo 401(k) and profit-sharing plan must be established by December 31 of the tax year, though contributions can be made until your filing deadline. Defined benefit plans also must exist by December 31.
What is the best retirement plan for a freelancer or independent contractor?
For most freelancers and independent contractors without employees, a solo 401(k) offers the highest contribution limits and greatest flexibility. If you prefer minimal paperwork, a SEP IRA is a strong alternative. The best choice depends on your income, savings goals, and willingness to handle plan administration.
Can I have a retirement plan if I also have a W-2 job?
Yes. If you earn self-employment income on the side, you can set up a SEP IRA, solo 401(k), or other self-employed retirement plan for that income. However, your total employee deferrals across all 401(k) plans (including your employer’s plan) cannot exceed the annual limit of $23,500 for 2025. Employer contributions to your self-employed plan are calculated separately based on your net self-employment earnings.
Are contributions to self-employed retirement plans tax-deductible?
Yes. Contributions to SEP IRAs, solo 401(k) employer contributions, profit-sharing plans, and defined benefit plans are tax-deductible on your federal return. Employee deferrals to a solo 401(k) are made pre-tax (unless you elect Roth treatment, in which case they are not deductible but grow tax-free). These deductions directly reduce your adjusted gross income.
