The Popular Roth IRA and Other Self-Employed Retirement Plans to Consider

There are five main choices for the self-employed or small-business owners: an IRA (traditional or Roth), a Solo 401(k), a SEP IRA, a SIMPLE IRA or a Defined Benefit Plan.

1. Traditional or Roth IRA - is best for those just starting out. If you’re leaving a job to start a business, you can also roll your old 401(k) into an IRA. The contribution limit is $7,000 in 2024 and 2025 ($8,000 if age 50 and older). There is a possible tax deduction on contributions to a traditional IRA; no immediate deduction for Roth IRA, but withdrawals in retirement are tax-free. Roth IRAs can be transferred to your heirs. Tradition and Roth IRA’s are individual plans. If you have employees, they can set up and contribute to their own IRAs.

2. Solo 401(k) - is best for A business owner or self-employed person with no employees (except a spouse, if applicable). The contribution limit for 2024, is $69,000 plus a $7,500 catch-up contribution, or 100% of earned income, whichever is less. In 2025, the limit rises to $70,000. The catch-up contribution remains the same for 2025, but those ages 60 to 63 are eligible for a larger contribution of up to $11,250 because of Secure 2.0 Act changes. Tax advantages of this plan works just like a standard, employer-offered 401(k): You make contributions pre-tax, and distributions after age 59 ½ are taxed. As an employee you can’t contribute to a solo 401(k) if you have employees. But you can hire your spouse so they can also contribute to the plan. Your spouse can contribute up to the standard employee 401(k) contribution limit, plus you can add in the employer contributions for up to a total of $69,000 in 2024 ($70,000 in 2025), plus a catch-up contribution, if eligible. This potentially doubles what you can save as a couple. You’ll need to file paperwork with the IRS each year once you have more than $250,000 in your account.

3. SEP IRA - Best for: Self-employed people or small-business owners with no or few employees.Contribution limit: The lesser of $69,000 in 2024, or up to 25% of compensation or net self-employment earnings, with a $345,000 limit on compensation that can be used to factor the contribution. In 2025, that limit rises to $70,000, with a $350,000 limit on compensation. Again, net self-employment income is net profit minus half of your self-employment taxes paid and your SEP contribution. No catch-up contribution. Be sure to make your contributions by the federal income tax filing deadline, usually mid-April, or the extension deadline if filing for an extension. Tax advantage: For traditional SEP IRA contributions, you can deduct the lesser of your contributions or 25% of net self-employment earnings or compensation — limited to that $345,000 cap per employee in 2024, or $350,000 in 2025 — on your tax return. Distributions in retirement are taxed as income. Previously, there was no Roth version of a SEP IRA, but the Secure 2.0 Act changed this. Roth contributions to a SEP IRA are not deductible, but qualified withdrawals can be taken tax-free in retirement. Employee element: Employers must contribute an equal percentage of salary for each eligible employee, and you are counted as an employee. That means if you contribute 10% of your compensation for yourself, you must contribute 10% of each eligible employee’s compensation. Get started: You can open a SEP IRA at many online brokers just as you would a traditional or Roth IRA, with a few extra pieces of paperwork.

4. SIMPLE IRA - Best for: Larger businesses with up to 100 employees. Contribution limit: Up to $16,000 in 2024, plus a catch-up contribution of $3,500 if you're 50 or older. If you also contribute to an employer plan, the total of all contributions can’t exceed $23,000 in 2024. In 2025, the limit rises to $16,500 (or $17,600 for those with certain SIMPLE IRA plans). The catch-up limit remains $3,500, but some people may be able to contribute up to $3,850. Those aged 60 to 63 also get a higher catch-up limit of $5,250. Contributions must also be made by tax day or the extension deadline, if applicable. Tax advantage: Contributions to a traditional SIMPLE IRA are deductible, but distributions in retirement are taxed. Contributions made to employee accounts are deductible as a business expense. Roth contributions are not deductible, but qualified withdrawals are tax-free. Employee element: Unlike the SEP IRA, the contribution burden isn’t solely on you: Employees can contribute through salary deferral. But employers are generally required to make matching contributions. Choosing the latter means the employee does not have to contribute to earn your contribution. The compensation limit for factoring contributions is $345,000 in 2024 and $350,000 in 2025. Get started: The process is similar to a SEP IRA — you can open a SIMPLE at an online broker, with a heavier paperwork load than your standard IRA.

5. Defined Benefit Plan - Best for: A self-employed person with no employees who has a high income and wants to save a lot for retirement on an ongoing basis. Contribution limit: Calculated based on the benefit you’ll receive at retirement, your age and expected investment returns. Tax advantage: Contributions are generally tax deductible, and distributions in retirement are taxed as income. An actuary must figure your deduction limit, which adds an administrative layer. Employee benefit: If you have employees, you generally offer this plan to them and make contributions on their behalf. Get started: Your options for brokerages are more limited than with the above accounts, but Charles Schwab offers defined benefit plans.