Why save for retirement
You need to save because Social Security retirement benefits are only a safeguard against extreme poverty. If we want to live comfortably, we also need additional income: an employer pension, investment income or our own savings. Individual retirement plans let us build the financial cushion we need.
The rules give business owners and self-employed people more options in retirement planning than employees.
Who can set up a retirement plan for the self-employed
Here are the people who are eligible to have retirement plans for the self-employed:
- Owners of sole proprietorships, partnerships and LLCs.
- Owners of corporations, including “S” corporations (Subchapter “S” Corporations).
- Professionals (accountants, artists, lawyers, dentists, doctors, etc.).
- People who work for themselves full-time or part-time (you can be an employee and earn extra money on the side after hours).
Note: If you have hired someone, a retirement plan for the self-employed must cover not only you but also eligible employees.
If you are an employee and earn extra money on your own, you can have a retirement plan at work plus a plan for the self-employed. On top of that, every person in America, including a business owner, can have an individual retirement account, an IRA or Roth IRA, although you cannot always contribute to both at the same time. As you can see, it is possible to participate in several retirement plans.
Advantages of plans for the self-employed
A retirement plan lets you save on taxes: it gives you an immediate tax deduction and defers taxes on investment earnings until the money is withdrawn from the account. In addition, these plans protect you from creditors, because under state law the money accumulated in them cannot be seized for debts. This means that if a business owner declares bankruptcy, creditors will not be able to take away his retirement savings.
An attractive retirement plan can also help you attract good employees and prevent staff turnover.
Keep in mind that withdrawals from retirement accounts before age 59½ are treated as early withdrawals and are subject to a ten-percent penalty, although there are exceptions.
Not just an IRA or Roth IRA
We are familiar with IRAs (Individual Retirement Accounts) – savings plans meant to encourage people to put money aside for retirement. In 2026 you can put up to $7,500 into an IRA, plus $1,100 for people over fifty, but no more than you earned in that year.
Business owners and the self-employed can shelter much more from taxes. The IRS describes the options on its page Retirement Plans for Self-Employed People: www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people.
The SIMPLE IRA plan
The Savings Incentive Match Plan for Employees (SIMPLE) is a retirement plan for small businesses and for people doing business as sole proprietors, in a partnership or an LLC. A SIMPLE can take the form of an IRA (Individual Retirement Account) or a 401(k) plan. Employers with up to 100 employees can also have this account, but they must offer it to all their eligible employees. This means the owner cannot use the plan just for himself. Here we discuss the simplest version – the SIMPLE IRA – for a self-employed person with no employees.
A SIMPLE IRA, as the name suggests, is meant to be simple to set up and administer. It is not subject to many of the complicated rules that govern other plans.
You can contribute up to 100% of your self-employment income to a SIMPLE IRA, up to a maximum of $17,000 in 2026, plus up to $4,000 for people over fifty (for people aged 60–63 – up to $5,250). Somewhat different limits apply at some small businesses – the IRS provides the details. As a self-employed person you are both the employer and the employee, so as the employee you are entitled to put aside an additional 3% of your net earnings. The total contribution cannot exceed your net self-employment earnings for the year.
Example: As a self-employed plumber you earned $50,000 net for the year, after deducting business expenses. You contribute $17,000 to a SIMPLE IRA, plus $4,000 if you are over fifty, plus $1,500 (3% of earnings), for a total of $22,500. That is much more than you could shelter in a traditional IRA.
Solo 401(k)
The plan known as a solo 401(k), or One-Participant 401(k) Plan, is a gold mine for business owners with substantial earnings. It is designed for business owners or the self-employed who have no employees (other than their spouse). A solo 401(k) lets you contribute up to $72,000 in 2026, plus an $8,000 catch-up contribution for people over fifty (for people aged 60–63 – $11,250), but no more than your net income.
The rules for calculating allowable contributions depend on whether you are only the owner or also an employee of your business.
A one-participant 401(k) plan can cover your spouse (say, your wife) if she is your only employee. Remember that your wife must officially be on the payroll, which means that income taxes and Social Security are withheld from her wages. It is best to set up a 401(k) plan before the end of the year and to work out the contribution deadlines with your accountant.
Conclusion: A solo 401(k) is an attractive and flexible tool for sheltering a large part of your earnings from taxes, or even all of them. In a good year you can put aside large amounts, and less in lean years.
SEP IRA
The Simplified Employee Pension Plan, known as a SEP IRA for short, is a flexible and simple plan, convenient for any type of business with no employees or only a few, such as a corporation, partnership or sole proprietorship, and also for people working for themselves, for example consultants.
For the self-employed and small business owners, a SEP IRA makes it possible to:
- put aside from 0% to 20% of earnings a year (up to 25% for employees), up to a set limit ($72,000 in 2026); contribution limits are indexed for inflation every year;
- change the amount of contributions from year to year: in lean years you can contribute less or nothing.
If you choose a SEP IRA for yourself, you must make it available to the company’s employees to the same extent, which can be costly. A SEP can be set up and funded as late as the deadline for filing the tax return for the year (usually April 15, or later if you get an extension).
A SEP IRA is attractive for people who want the option, but not the obligation, to put aside up to 20% of their earnings. Because of its flexibility, it is ideal for people starting a business or with irregular income, such as consultants, architects, real estate agents, artists, actors, etc.
Updated October 2026.
