How to save for retirement when you're self-employed

When you work for yourself, you can open your own retirement plan: a regular IRA, a SEP IRA or a solo 401(k). A solo 401(k) usually lets you save the most at low and middle incomes, because you put money in both as the employee and as the employer.

Three main options

A traditional or Roth IRA allows $7,500 a year. A SEP IRA lets the business put in up to 25% of compensation, capped at $72,000. A solo 401(k) adds an employee deferral of up to $24,500 on top of that employer share.

Self-employed math is different

For a sole proprietor, compensation means net profit minus the deductible half of self-employment tax, minus the contribution itself. In practice the 25% employer rate works out to 20% of net profit after the self-employment tax deduction.

The overall cap

Employee and employer contributions to one person's defined contribution plans can't top $72,000 for 2026, or 100% of compensation if that is less. Catch-up contributions for age 50 and over, $8,000 in a 401(k), go on top.

The tax break

Traditional (pre-tax) contributions for yourself are deducted on Schedule 1 of Form 1040. They lower income tax, but not self-employment tax, which is figured on your net profit before the contribution.

How a SEP IRA works

A SEP IRA is an IRA that your business funds. You open it at a brokerage or bank with a short IRS form or a ready-made plan document, and you decide each year how much to put in, from nothing up to the limit. Light years are fine, since there is no required contribution.

The catch comes if you hire. A SEP must give every eligible employee the same percentage of pay you give yourself. That can get expensive, so many business owners with staff use a different plan, such as a SIMPLE IRA or a 401(k) for the whole team.

How a solo 401(k) works

A solo 401(k), also called a one-participant 401(k), is a regular 401(k) for a business with no employees other than the owner and a spouse. You wear two hats. As the employee you can defer up to 100% of compensation, up to $24,500. As the employer you can add up to 25% of compensation, which is about 20% of net profit for a sole proprietor.

That double role is why a solo 401(k) usually beats a SEP at moderate incomes. At $50,000 of profit, the SEP employer share is under $10,000, but the employee deferral can add up to $24,500 more. Many providers also let you make the employee part as Roth, so you pay tax now and withdraw tax-free in retirement.

There is a little more paperwork. Once the plan holds $250,000 or more at year end, you generally file Form 5500-EZ each year.

How to figure your number

Start with your net profit from Schedule C. Subtract half of your self-employment tax (the self-employment tax calculator shows it). Multiply what's left by 20% to get the most you can put in as the employer, in a SEP or a solo 401(k).

For a solo 401(k), add your employee deferral, up to $24,500 or your remaining compensation, whichever is less. Check the total against the $72,000 cap. The worksheets in IRS Publication 560 walk through the exact steps if you want to confirm your figure.

Which one to choose

Choose an IRA alone if you are just starting out and want the simplest account. Choose a SEP IRA if you want very little paperwork, your profit is high enough that 20% of it gets close to the cap, or you are late and need a plan you can open after the year ends.

Choose a solo 401(k) if you work alone and want to save as much as you can at a normal freelance income, or you want a Roth option. You can also hold an IRA alongside either plan, although a traditional IRA deduction may be limited once you are covered by a workplace plan.

Fitting it into an uneven income

You don't have to contribute on a schedule. Many self-employed people send a fixed percentage of each client payment to retirement, then top up after the year ends, once profit is clear. SEP contributions and the employer part of a solo 401(k) can be made up to your tax filing deadline, including extensions.

Build an emergency fund first. Self-employed income swings, and pulling money from a retirement account before age 59½ usually costs income tax plus a 10% penalty.