Choosing a Retirement Plan When You're Self-Employed as a Business Owner

March 11, 2025

March 5, 2025

By

Conway Wealth

Self-employed business owners face unique challenges when saving for retirement, starting with choosing the right savings plan. But if you’re self-employed, you have tax-advantaged options: a solo 401(k), SEP IRA (simplified employee pension individual retirement account) or SIMPLE plan (savings incentive match plan for employees), as well as traditional and Roth IRAs. While these plans can be powerful tools to build a nest egg, they come with tax implications, investment options and vesting schedules to consider. It's important to understand your options so you can choose a plan that aligns with your business structure and financial goals.

Quick facts:

  • Small business owners and self-employed individuals can save for retirement with tax-advantaged retirement plans.  
  • Popular plans include solo 401(k)s, SEP IRAs, SIMPLE IRAs and traditional IRAs.
  • Each plan has unique contribution limits and tax implications.  

Understanding self-employed retirement plans

Many investors save for their golden years through retirement plans at work, such as 401(k)s and 403(b)s. But if you own a small business or are self-employed, you are the employer, meaning you'll need to set up your own retirement plan. Enter the solo 401(k), SEP IRA and SIMPLE IRA.  

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Solo 401(k)  

A solo 401(k), sometimes called a one-participant 401(k) or an individual 401(k), is a 401(k) plan designed for solopreneurs. These plans generally have the same rules and requirements as employer-sponsored 401(k)s. They're available to sole proprietors, freelancers and other small businesses with no employees (excluding a spouse who earns income from the business). A key benefit of the solo 401(k) is the ability to contribute to the plan in two ways – as an employer and as an employee – providing a high contribution limit. These plans offer a wide range of investment options, including stocks, bonds and mutual funds, and your contributions may be tax deductible. However, they can be complicated to set up and you may face high management fees.1

Pros and Cons of the 401(k).

SEP IRA

A SEP IRA is a simple way to set aside retirement savings for yourself and your employees. Unlike many retirement plans, SEP IRAs are funded exclusively through employer contributions, though you don't have to contribute every year. Instead, you decide whether you will contribute in a given year, and if so, how much you will contribute. The contributions need to happen with the same frequency – and be based on the same rate – for all eligible participants. Contributions are tax-deductible up to 25% of each employee’s pay.2 Notably, SEP IRAs follow the same investment, rollover and distribution rules as other IRAs, and can be set up as traditional or Roth accounts.

Pros and Cons of SEP IRA.

SIMPLE IRA

A SIMPLE plan is for small businesses with up to 100 employees, offering lower start-up and operating costs than conventional employer-sponsored retirement plans. Employees may elect to contribute, while employers must make either a matching contribution up to 3% of compensation or a 2% nonelective contribution for each eligible employee (even if the employee doesn't contribute to their own account), up to annual contribution limits.3 SIMPLE IRAs follow the same investment, rollover and distribution rules as traditional IRAs, though contribution limits for each plan differ.

Pros and Cons of SIMPLE IRA.

Traditional IRA

Another option – and one that is easy to set up whether or not you’re self-employed – is a traditional IRA. Anyone with earned income can open and contribute to this type of plan. You may be able to deduct your contributions, depending on your tax filing status, modified adjusted gross income (MAGI) and whether you (or your spouse) are covered by a retirement plan at work.5

Those contributions grow tax-deferred, but you'll pay taxes on withdrawals in retirement. For this reason, a traditional IRA can be a better choice than its cousin, the Roth IRA, if you expect your tax rate to be lower in the future. (Roth IRAs offer no upfront tax breaks, but qualified withdrawals in retirement are tax-free.)

Pros and Cons of a Traditional IRA.

Tax considerations for maximizing contributions

Business owners can maximize their contributions and minimize tax implications by choosing the plan – or plans – that makes the most sense for them.

Solo 401(k)

  • Tax implications: Contributions are tax-deductible up to certain limits; earnings grow tax-deferred.
  • Contribution limits: Solo 401(k) plans allow both employer and employee contributions, increasing your potential savings.1
Contribution limits for solo 401(k).

SEP IRA

  • Tax implications: Contributions reduce taxable income, and earnings grow tax-deferred until withdrawal.
  • Contribution limits: Employers contribute a percentage of each eligible employee's pay, up to 25% of compensation.
Contribution limits for SEP IRA.

SIMPLE Plan

  • Tax implications: Employer contributions are pre-tax, reducing current taxable income; employee contributions reduce taxable income as well.
  • Contribution limits: Employers can match up to 3% of salary for employees and owners.
Contribution limits for SIMPLE Plan.

Traditional IRA

  • Tax implications: Contributions and earnings grow tax-deferred until withdrawal.
  • Contribution limits: IRAs are easier to open and manage than some retirement plans, but the trade-off is their relatively low contribution limits.7
Contribution limits for Traditional IRA.

Bottom line

A traditional or Roth IRA can be a great starting point for retirement savers, as anyone with earned income can contribute. If you're self-employed or have a small business, you can save even more with a solo 401(k), SEP IRA or SIMPLE IRA. The best plan for you depends partly on the size of your business.

For example, solo 401(k)s are designed for solopreneurs and their spouses who earn income from the business. SIMPLE IRAs, on the other hand, are available to businesses with up to 100 employees, provided the employer doesn't maintain any other retirement plans. SEP IRAs can work well for businesses of any size, meaning you can contribute if you're a sole proprietor or have a staff of 200, though these plans can get expensive to maintain as your workforce grows.

It’s also important to consider factors such as tax implications, operating costs and filing requirements. A financial advisor can help you choose the best plan for your unique situation so you can stay focused on running your business and reaching your goals. To find the right advisor for your specific needs, reach out to the Conway Wealth team at info@conwaywealthgroup.com or call 973.285.3640.

Investment advisory and financial planning services offered through Summit Financial, LLC, an SEC Registered Investment Adviser, doing business as Conway Wealth Group (4 Campus Drive, Parsippany NJ 07054). Neither Summit Financial nor Conway Wealth Group provide tax advice. 7690839.1

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  1. Internal Revenue Service, “One-Participant 401(k) Plans.” (February 2025)
  2. Internal Revenue Service, “Simplified Employee Pension Plan (SEP).” (August 2024)
  3. Internal Revenue Service, “SIMPLE IRA Plan.” (August 2024)
  4. Internal Revenue Service, “SIMPLE IRA Withdrawal and Transfer Rules.” (November 2024)
  5. Internal Revenue Service, “IRA Deduction Limits.” (August 2024)
  6. Internal Revenue Service, “401(k) limit increases to $23,500 for 2025, IRA limit remains $7,000.” (November 2024)
  7. Internal Revenue Service, “IRM Procedural Update, Various 2025 Tax Year Limitations.” (November 2024)

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Initial 2021 Tax Considerations

With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.

Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.

Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.

Income & Capital Gains Tax Proposals

With the swearing-in of a new President and Vice President, plus convening of the next Congress, affluent Americans are weighing how changes in federal government may financially impact them.

Given that Democrats hold the Presidency and control both Houses of Congress by a slim margin, it now seems likely that tax reform could be passed as a budget reconciliation bill and then signed into law. While there is a remote chance that expected tax changes will be retroactive, it is more probable that they would take effect immediately upon becoming law or even at the start of 2022.

Since 2021 may be a last opportunity to capitalize on current income, capital gains, and transfer tax laws, families are considering key financial & estate planning adjustments, where appropriate.

“Be fearful when others are greedy and greedy when others are fearful.”

Responsive Planning

Given the above proposals, there is great uncertainty surrounding future tax policy. Even if some of the more benign tax provisions now in effect are not repealed, many of them are scheduled to sunset at the end of 2025 already.

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  • Phase out the 20% pass-through deduction on qualified business income for people with annual income exceeding $400,000
  • Eliminate capital gain deferral through like-kind exchanges of business & investment real estate for people whose yearly income exceeds $400,000
  • Increase the highest corporate income tax rate from 21% to 28% and subject corporate book income of $100,000,000 or more to a 15% alternative minimum tax
  • Double the tax rate on global intangible low tax income (GILTI) earned by foreign subsidiaries of American businesses from 10.5% to 21%
  • Impose a 10% surtax for U.S. companies that move manufacturing & service jobs to another country and then provide services or products for sale back to the American market
  • Create an advanceable 10% “Made in America” credit for manufacturers’ revitalizing, re-tooling and hiring costs
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