How to retire when you're self-employed

If you're self-employed, you might be too busy chasing the next gig to think about saving for retirement. Maybe you don't think you can retire at all. I can relate.

But there are plenty of ways to save for retirement outside of traditional jobs. Whether you plan on taking full retirement at a specific age, semi-retire with a part-time job, or have no retirement plan at all yet, you have options.

The first step to retiring when you're self-employed is making your plan. How do you envision life after work? Your ideal lifestyle and spending habits in later years will help you decide which route to go and how much you need to save.

Only once you've got the beginnings of a plan, can you start thinking about how to save. Keep in mind that each retirement savings route has its own tax implications and rules for contribution and withdrawal. So here's what you should know about retiring if you're your own boss in the U.S.

• Traditional retirement savings

• Self-employed retirement savings

• Government benefits

• Non-traditional savings

Self-employed retirement plans at a glance

Traditional retirement accounts

Even if you don't have a spouse or partner with a full-time job, you can absolutely still open a traditional retirement account, but some accounts may not be available to you unless your business is incorporated.

Traditional and Roth IRAs

IRAs are tax-advantaged accounts that allow you to invest in the stock market and build your savings tax-free. Anyone can open one at most major banks and investment firms like Charles Schwab and Fidelity.

• Traditional IRAs are tax-deductible because you can contribute pre-tax dollars to the account, lowering your taxable income for the year. But because you get tax savings upfront, your withdrawals will be taxed. You may also have to pay additional taxes and fees if you take distributions before retirement age (59 ½). Traditional IRAs don't have an income limit, but tax deductions are based on MAGI and whether you have access to a retirement account through work.

• Roth IRAs are similar, but they only allow you to contribute after-tax dollars. So instead of getting your tax deduction right away, your withdrawals in retirement will be tax and penalty-free. Roth IRA contributions are also income-based, and if you earn above a certain amount, your max allowable contribution will decrease. For the 2024 tax year, you can earn up to $146,000 in Modified Adjusted Gross Income (MAGI) before your contribution is reduced, and up to $150,000 in 2025 as a single filer. Joint filers can earn up to $230,000 in 2024 and $236,000 in 2025.

If you already have access to a retirement account through a client, this can affect how much you can save and deduct.

Note that contribution limits for IRA accounts are calculated together. The annual limit for both Traditional and Roth IRA contributions is $7,000, or $8,000 if you're over 50, for both the 2024 and 2025 tax years.

At this stage in our lives, my husband and I prefer Traditional IRAs for the upfront tax savings, but we hope to open Roths soon as well.

401(k)s

When I was employed full-time, I had a 401(k), which is probably the most well-known retirement account. This one can be tricky to open as a freelancer because it was created for employers to provide a retirement savings option for employees and even contribute to it. But we'll get into that.

401(k)s are somewhat similar to IRAs in that they're also tax-advantaged accounts with a contribution limit and investment options. Like Traditional IRAs, you can deposit pre-tax dollars to lower your taxable income. And like IRAs, you can generally only start taking distributions from your 401(k) once you hit retirement age.

But 401(k)s have higher contribution limits than IRAs. For the 2024 tax year, you can pay up to $23,000 into your 401(k) or $30,500 for those over 50. In 2025, the contribution limit increases to $23,500 or $31,000 for 50+ workers. 

Now, 401(k)s aren't widely available to open at banks or online brokers: you need to have an employer to open one. But if you operate as a corporation (LLC, S-Corp, or C-corp), you have the option to set up payroll and pay yourself a salary as your business's employee. That means you can set up and contribute to your own 401(k).

The big advantage here is that employers also get to contribute to the account. Overall limits for 401(k) contributions are $69,000 ($76,500 for 50+ workers) in 2024 and $70,000 (or $77,000) in 2025. That's an additional tens of thousands of dollars. Another advantage is that, as your own employer, you can choose your preferred investment plan.

Just know that you may not be able to deduct your entire employer contribution for tax savings. Talk to your accountant about what and how much you can deduct.

Self-employed retirement accounts

Though traditional retirement accounts are the most common, these savings options are meant specifically for freelancers and small business owners, which can make them a bit easier to set up.

Simplified Employee Pension (SEP) IRA

SEP IRAs, originally used for small businesses to set up retirement savings for their employees, can also be opened individually at any major bank or financial institution if you're self-employed.

Similar to Traditional IRAs, SEP IRAs are tax-deferred, so you get your savings upfront by lowering your taxable income and then paying tax on withdrawals later.

Like 401(k)s, SEP IRAs have a higher contribution limit than other IRAs. For the 2024 tax year, you can contribute a maximum of 25% of your income up to $350,000 or $69,000, whichever is less. In 2025, the maximum contribution becomes $70,000. (That 25% of your income is net, not gross. So the lower your taxable income is, the less you can contribute and vice versa.) There's no additional contribution for self-employed workers over 50. 

Distributions before retirement age (59 ½) will be taxed as income along with additional penalties for early withdrawal.

Solo 401(k)

Traditional 401(k)s are only available to W-2 employees, but solo 401(k)s give freelancers access to most advantages of a 401(k) without needing an employer. Also known as a one-participant or individual 401(k), this savings account allows sole proprietors with no employees, or small business owners, to contribute as both "employer" and "employee." Solo 401(k) contributions are also tax-deductible and follow most of the same rules and requirements as traditional 401(k)s, such as withdrawal age.

Contributions limits are $23,000 in 2024 and $23,500 in 2025, plus up to 25% of net business income. It might take a bit of calculation to determine exactly how much you can contribute, so let's try an example.

Say your net income for 2024 (minus 50% of self-employment tax) is $80,000, and you contribute the full $23,000 to your solo 401(k) as the "employee." Then your max "employer" contribution would be $80k - $23,000 x .25 (25%), or $14,250. That brings your total to $37,250.

Again, the higher your net income, the more you can contribute.

In total, you can contribute and deduct up to $69,000 for the 2024 tax year and $70,000 in 2025. Like standard 401(k)s, you can also save an extra catch-up amount if you're over 50: $7,500 in 2024 and 2025.

Now that I'm freelancing again, I'm considering shifting my 401(k) to a solo 401(k) so I can take advantage of that higher contribution limit.

Government benefits

Good news: freelancers do qualify for social security benefits.

When you're employed, your company withholds a percentage of your paycheck for taxes, which includes Social Security, and pays half of it (6.2%). But as a freelancer, you're responsible for the full 12.4% as part of your 15.3% self-employment tax.

As long as you've been actively working and paying your taxes, you should be eligible for Social Security. Eligibility is based on how many years you've worked as well as your net income. 

Every year you work, you earn "work credits," one credit for each $1,730 of net income during the year as of 2024. Once you hit $6,920, you automatically earn the annual maximum of 4 work credits. No one needs to earn more than 40 work credits (approximately 10 years of work) to be eligible for Social Security benefits.  

If you already receive Social Security Income (SSI) or Social Security Disability Income (SSDI), you should also receive Social Security benefits when you retire. Your disability benefits should convert automatically to retirement benefits, but the amount you receive may not change.

Want to calculate how much your benefit will be when you retire? Try the Social Security Administration's (SSA) Quick Calculator to get an estimate.

Non-traditional retirement savings

There are many non-traditional ways to save for retirement, but the two I'd like to mention here are Health Savings Accounts (HSAs) and passive income.

• An HSA is a tax-advantaged account you can access when you have a certain type of high-deductible health plan (HDHP). It was created to give workers a way to save for health expenses while reducing their taxable income through pre-tax contributions. But it can also double as a retirement account, because you can invest anything over $1,000 and the money in your account will rollover from year to year. The downside is that HSAs have a relatively low contribution limit: $4,150 for individuals and $8,300 for families in 2024 and $4,300 or $8,550 in 2025. So if you spend a significant amount on healthcare costs, your savings will likely grow slowly.

• Passive income, on the other hand, can be a fairly quick way to boost your savings. This covers anything from investing in the stock market through a brokerage or other investment account, to real estate, a side business, and more. Passive income tends to come with more risk than retirement savings accounts, but the potential rewards are equally high. Finding your comfort level with risk and the different ways you can save will go a long way to helping you choose a retirement plan that's right for you.

For my husband and me, the ideal plan includes a mix of traditional and non-traditional methods that will allow us to build a nest egg while also making sure we don't have to pay too many taxes in retirement.

What's your retirement plan?

Retirement is an important phase of life, one that needs a plan to help you meet late-life expenses like healthcare costs, remaining debts, and living costs. Self-employed folks have it harder because we have to do everything ourselves. But just like with our work, we also have the opportunity to build a unique retirement plan that suits our individual needs.

Related reading:

• The best apps for freelancers

• How to take vacation as a freelancer

• The best self-employed accounting software tools

• The best invoicing software