Retirement Plan Options For Business Owners & The Self-Employed

Self-employed individuals and small-business owners can choose from several retirement plans created specifically for them. The main options include:

A Traditional or Roth IRA is open to anyone with earned income, subject to certain income limits for Roth contributions. A Solo 401k, also known as a one-participant 401k, is available to business owners who have no employees other than a spouse. SEP and SIMPLE IRAs are employer-sponsored plans typically used by small businesses.

Here’s how each plan works, what sets them apart, and how they can fit different self-employment or business situations.

Retirement Options at a Glance

Each self-employed retirement plan has its own eligibility requirements, contribution limits, and tax rules. Here’s a quick comparison of how they stack up for 2025.

Account	Contribution Limits (2025)	Roth	✅ Pros	❌ Cons
Solo 401k	$70,000 ($77,500 if age 50+)	Yes, if the plan includes a designated Roth option	High contribution potential and optional Roth feature; flexible investment choices depending on plan setup	Must have no common-law employees other than a spouse; starting 2025, certain long-term part-time workers (≥500 hours in two consecutive years) may become eligible, ending solo status
SEP IRA	$70,000	No	Allows large, tax-deductible employer contributions; simple to set up and maintain	No Roth option; contributions are employer-only
Roth IRA	$7,000 ($8,000 if age 50+)	Yes	Qualified withdrawals are tax-free; contributions can be withdrawn anytime; no required minimum distributions (RMDs)	Low contribution cap; high-income earners may be restricted once above 2025 MAGI phase-out ranges ($150k–$165k single, $236k–$246k joint)
Traditional IRA	$7,000 ($8,000 if age 50+)	No	Contributions may be deductible depending on income and workplace coverage	Deductibility phases out at higher incomes if you or your spouse are covered by a workplace plan
SIMPLE IRA	$16,500 ($20,000 if age 50+)	May be available if plan includes a Roth feature under SECURE 2.0	Easy and affordable option for small businesses to offer retirement benefits; contributions are tax-deductible	Lower contribution limit compared to a 401k

Solo 401k

A Solo 401k can be an attractive retirement plan for self-employed individuals and owner-only businesses. It combines high contribution limits with flexibility in plan design. However, the right fit always depends on each person’s income, goals, and business setup.

A Solo 401k works like a standard employer 401k but is designed for a business owner with no common-law employees other than a spouse. Many plans include a designated Roth account, allowing both pre-tax and Roth contributions.

Starting in 2025, any employee who works at least 500 hours in two consecutive years must be allowed to make deferrals. If that applies, the plan no longer qualifies as “solo.”

📌 Also read: How Solo 401k Rollovers Work

How It Works

A Solo 401k follows the same tax and compliance framework as a traditional 401k. The difference is that you act as both the employer and the employee.

Two Ways to Contribute

Investment Control

✏️ Hypothetical Example:

If both spouses work in the same business, each can have a participant account under the same plan. This can effectively double the household’s total contributions.

Eligibility

A Solo 401k is typically available to:

To qualify, you must have self-employment income and no common-law employees other than your spouse. From 2025 onward, long-term part-time employees (working at least 500 hours in two consecutive years) must be given the opportunity to defer. Once this happens, the plan can no longer stay “solo.”

Contribution Limits

For 2025, the maximum total contribution to a Solo 401k is $70,000 ($77,500 if age 50 or older).

Employee Deferrals

Employer Contributions

This combination allows very high savings potential, especially for those with strong business income.

📝 Note: There are no income limits for contributing to a Solo 401k. You qualify regardless of how much you earn, as long as your business has no employees.

Benefits and Tax Advantages

✅ High Contribution Potential

You can contribute significantly more compared to IRAs, which may help accelerate retirement savings.

✅ Pre-Tax and Roth Flexibility

If your plan includes a Roth option, you can deposit all employee deferrals into a designated Roth account, up to $23,500 (or $31,000 if age 50+) in 2025.

✅ Rollovers Allowed

You can roll over funds from other eligible retirement plans or IRAs (except from a Roth IRA to a designated Roth account).

Disadvantages

❌ Employee Restrictions

You cannot have common-law employees, except for a spouse. Starting in 2025, certain long-term part-time employees must be allowed to contribute, which can disqualify the plan’s “solo” status.

❌ Administrative Duties

As the plan sponsor, you must maintain compliance records and file Form 5500-EZ once plan assets exceed $250,000.

❌ Limited Appeal for Growing Teams

A Solo 401k may not be ideal for businesses planning to hire full-time employees soon.

Withdrawals and Distributions

Withdrawals are generally allowed without the 10% early withdrawal tax once you reach age 59½. Tax rules differ between pre-tax and Roth contributions.

✅ Pre-Tax Accounts – Distributions are taxed as ordinary income.
✅ Roth Accounts – Qualified distributions are tax-free once conditions are met.

RMDs (required minimum distributions) usually begin at age 73. However, starting in 2024, designated Roth accounts in employer plans are not subject to lifetime RMDs.

Early Withdrawals

Distributions made before age 59½ are subject to a 10% early withdrawal penalty plus income tax on the withdrawn amount, unless an exception applies.

FREE PDF DOWNLOAD

The Solo 401k Handbook

Everything you need to know in a handy ebook format.

SEP IRA

A SEP IRA can be a practical, low maintenance retirement plan for small businesses, especially with few or no employees. Its high contribution limits and minimal administrative requirements make it appealing, but costs can rise as you hire more people because of equal-percentage funding rules.

A SEP IRA (Simplified Employee Pension) is an employer-funded retirement plan. Employees do not contribute to their own SEP IRAs. Since SECURE 2.0, employers can choose to offer Roth SEP contributions, although these contributions are not tax-deductible.

If your business has grown beyond  Solo 401k eligibility (e.g., you hire your first employee), a SEP IRA might be worth considering.

📌 Also read: Solo 401k Vs SEP IRA: Which One Makes More Sense for 2025?

Eligibility

A SEP IRA can be set up by almost any type of business, including sole proprietorships, partnerships, and corporations. It’s often a fit for:

✅ Business Owners Transitioning from Solo 401k

Those who once qualified for a Solo 401k but have since hired full-time employees.

✅ Employers Seeking Simplicity

Owners who want to provide a retirement benefit without the administrative complexity of a traditional 401k.

✅ Growing Businesses

Those who don’t have employees yet but plan to hire soon.

All eligible employees must be included once they meet the plan’s participation requirements. Typically, an employee becomes eligible after working for the employer in at least three of the last five years, earning a minimum amount set by the IRS.

📝 Note: SEP IRAs are generally most cost-effective for businesses with few employees. This is because the employer must contribute the same percentage of compensation for every eligible worker.

Contribution Limits

The SEP IRA contribution limit for 2025 is the lesser of 25% of compensation or $70,000.

✅ Employer-Only Contributions

Only employers can contribute to SEP IRAs. Employees cannot make their own contributions.

✅ Equal Percentage Rule

If you contribute for yourself, you must contribute the same percentage of pay for every eligible employee.

✏️ Hypothetical Example:

If you contribute 20% of your compensation to your own SEP IRA, you must contribute 20% of every eligible employee’s compensation as well.

✅ No Catch-Up Contributions

Unlike the Solo 401k, the SEP IRA does not include catch-up contributions for individuals age 50 and above.

📝 Note: The overall contribution cap matches the Solo 401k limit, but without the employee salary deferral feature. This makes the SEP IRA simpler, but potentially less flexible.

Benefits and Tax Advantages

✅ High Contribution Limits

Employers can contribute up to 25% of compensation (subject to the dollar cap), allowing for substantial retirement savings.

✅ Tax-Deductible Contributions

Traditional SEP contributions are deductible as a business expense, reducing taxable income.

✅ Option for Roth Contributions

SECURE 2.0 now permits Roth SEP contributions if adopted in the plan. Roth contributions are made with after-tax dollars and grow tax-free.

✅ Easy to Set Up and Maintain

A SEP IRA can be opened quickly at most financial institutions with minimal paperwork or ongoing administration.

📝 Note: For small employers who want a retirement plan without complex filings or annual testing, a SEP IRA can be a cost-effective option.

Disadvantages

❌ Equal Contribution Requirement

If you make a contribution for yourself, you must contribute the same percentage of compensation for every eligible employee. This can become expensive as your workforce grows.

❌ No Employee Deferrals

Employees cannot make elective deferrals, meaning all contributions come from the employer.

❌ No Catch-Up Feature

There are no additional contributions allowed for individuals age 50 or older.

❌ Potential Cost Increase with Growth

As more employees qualify, the required contributions for all eligible staff can significantly raise total plan costs.

Withdrawals and Distributions

You can generally begin taking withdrawals from your SEP IRA without penalties once you reach age 59½.

✅ Standard Rules

Withdrawals are taxed as ordinary income. Required Minimum Distributions (RMDs) begin at age 73.

❌ Early Withdrawals

If you withdraw before age 59½, you’ll owe both income taxes and a 10% early withdrawal penalty unless an exception applies.

Traditional IRA and Roth IRA

Traditional and Roth IRAs are often considered the entry point for individual retirement savings. Anyone with earned income can open one, regardless of employment type. The contribution limits are lower compared to a Solo 401k or SEP IRA, but you can contribute to both an IRA and another self-employed plan in the same year. 

Contributions to a Solo 401k or SEP IRA do not reduce how much you can put into your IRA.

📌 Also read: Roth vs Traditional IRA

Eligibility

Anyone with earned income can open a Traditional IRA. Roth IRA contributions are allowed only if your income falls within the 2025 MAGI limits. There are no age restrictions for either type.

Income Limits

A Traditional IRA doesn’t have income limits. However, if you also have an employer-sponsored retirement plan, your tax deductions could get reduced to zero if your modified adjusted gross income (MAGI) is too high.

2025 Deduction Limits (Single Filers):

Roth IRAs, on the other hand, have strict income thresholds that limit contributions for higher earners.

2025 Roth IRA MAGI Limits (Single Filers):

Contribution Limits

For 2025, both Traditional and Roth IRAs share the same limits: $7,000 (or $8,000 if age 50 or older).

The key difference lies in how contributions and withdrawals are taxed:

Benefits and Tax Advantages

✅ Traditional IRA: Can reduce taxable income today if contributions are deductible.

✅ Roth IRA: Provides tax-free income in retirement. Contributions and earnings grow tax-free if withdrawal rules are met.

Disadvantages

❌ Traditional IRA: Lower annual limit compared to employer-sponsored plans. Deduction eligibility may phase out at higher incomes.

❌ Roth IRA: Direct contributions aren’t allowed once your income exceeds the MAGI limit. Contribution limits are also relatively small.

Withdrawals

You can withdraw from either type after age 59½ without the 10% early withdrawal penalty. However, the tax treatment differs:

A unique advantage of a Roth IRA is flexibility with contributions. You can withdraw your original contributions at any time, tax- and penalty-free.

✏️ Hypothetical Example:

If you contributed $20,000 to a Roth IRA and earned $5,000 in growth, you could withdraw the $20,000 anytime. To withdraw the $5,000 earnings tax-free, you must be over age 59½ and meet the 5-year rule.

Required Minimum Distributions (RMDs)

Traditional IRAs require you to start taking distributions at age 73. Roth IRAs have no RMDs during the owner’s lifetime, which can make them useful for passing wealth to beneficiaries.

SIMPLE IRA

A SIMPLE IRA is built for small employers, including self-employed individuals, who want a retirement plan without the high costs and complex setup of a traditional 401k. It covers both the owner and employees, making it a practical option for small teams.

Employers must choose between two contribution methods:

This structure makes a SIMPLE IRA a straightforward and affordable alternative to a company 401k plan.

How It Works

When you set up a SIMPLE IRA, you’re required to make contributions to your employees’ accounts each year. You can choose one of two contribution options:

These contributions are immediately vested, meaning employees own the money right away.

Eligibility

A SIMPLE IRA works best for business owners who want an easy, lower-cost retirement plan for themselves and their employees.

You can establish a SIMPLE IRA if you:

Owner-only businesses can also set up a SIMPLE IRA, though a Solo 401k or SEP IRA may offer higher contribution limits.

Employee Eligibility

Employees qualify to participate if they earned at least $5,000 in any of the past two years and are expected to earn at least $5,000 this year.

This rule is more flexible than many 401k plans, which often require employees to be at least 21 years old and have 1,000 hours of service in a year.

Contribution Limits

For 2025, the employee contribution limit for a SIMPLE IRA is $16,500, with an additional $3,500 catch-up for those age 50 or older (total $20,000).

Employer contributions, either the 3% match or 2% nonelective, are tax-deductible business expenses.

Benefits and Tax Advantages

✅ Lower setup and maintenance costs: Easier to establish and administer than a 401k.
✅ Employer tax deductions: Contributions made to employee accounts reduce taxable business income.
✅ Employee participation: Encourages retirement savings with mandatory employer contributions and immediate vesting.

Disadvantages

❌ Lower contribution limits: Compared to a traditional 401k or Solo 401k.
❌ Mandatory employer contributions: Can be burdensome if you have many employees.
❌ Limited flexibility: The plan design is more rigid than a 401k.

Under SECURE 2.0, employers may add a Roth SIMPLE feature, allowing employees to make after-tax contributions.

Withdrawals

Withdrawals are allowed after age 59½ without the 10% additional tax. However, funds are still taxable as ordinary income at that time.

Early withdrawals usually trigger a 10% additional tax, or 25% if taken within two years of joining the plan, unless an exception applies.

Comparing Retirement Plan Options for Business Owners

Each plan can serve a specific type of business setup or growth stage. The right choice depends on your income, employee count, and need for flexibility.

✅ Solo 401k

A Solo 401k can be one of the strongest options for self-employed individuals and business owners with no employees other than a spouse.

✅ SEP IRA

A SEP IRA can work well for small employers or those transitioning from a one-person business to a small team.

This setup can be cost-effective for businesses with a few employees but may get expensive if the workforce grows.

✅ Traditional IRA and Roth IRA

IRAs are often considered the starting point for individual retirement savings.

You can contribute to an IRA in addition to a Solo 401k or SEP IRA in the same year.

✅ SIMPLE IRA

A SIMPLE IRA can suit small employers who want to offer a retirement plan without the costs or paperwork of a 401k.

This plan can be a straightforward way to support employee retirement savings, especially for small businesses that want to keep costs manageable.

Wrapping It Up

Each retirement plan for business owners and self-employed individuals has its own strengths, contribution rules, and tax treatments. The right choice often depends on factors like your income level, business structure, and whether you plan to hire employees.

A practical next step is to review your business goals and cash flow to see which plan design aligns best with your needs. Some business owners start with a Solo 401k or SEP IRA for higher contribution potential, then transition to a SIMPLE IRA or other employer plan as their team grows.

It may also help to revisit your plan choice each year as tax laws and contribution limits change. Staying informed ensures your retirement strategy remains efficient and compliant over time.

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