Money Talks, So Should You

Ask Jane: What’s the best retirement plan for the self-employed?

Jane Bryant Quinn
by Jane Bryant Quinn, Dimespring Contributor  (@janebryantquinn)

It all depends on how much money you think you can save each year. Fancy plans let you save 25 percent of your income or more. Modest plans have low contribution limits.

If you won’t put away any more than $5,000 a year ($6,500 if you’re 50 and up), don’t bother with the plans designed for business. Chose a plain Individual Retirement Account.

If you’ve set your sights higher, however, you can choose among three plans that let you pack money away. They work best if you’re your own boss and have no employees (except maybe your spouse). If you do have employees, these plans have to cover them, too.

READ: What is a Rollover IRA?

Here’s a quick look at the possibilities:

  • SIMPLE plans. They can be set up as Individual Retirement Accounts or 401(k)s. The maximum contribution this year: $12,000 (or $14,500 if you’re 50 and up). They’re cheap and easy to administer.
  • SEP-IRAs. They’re handled like regular IRAs, which makes them also easy to administer. You contribute a straight percentage of your pay  up to 25 percent of your W-2 earnings if you’re incorporated or 20 percent of your net self-employment earnings. For high earners, there’s a contribution cap. You can’t put in any more than $51,000 this year.
  • Solo 401(k)s. There’s more paperwork to starting and maintaining a solo 401(k). But because of the way they’re structured, these plans let you save the most. As with SEP-IRAs, you contribute up to 25 percent of your W-2 earnings, if you’re incorporated or 20 percent of your net employment earnings. The maximum for top earners is $51,000 or  $56,500 if you’re 50 and up. 

Solo 401(k)s have a huge advantage for people with something less than top-level earnings. These plans let you start by saving 100 percent of your earnings up to $17,500 ($23,000 if you’re 50 and up), and start apply the percentages after that. The result is a much higher possible level of savings than you’d get with a SEP-IRA. For a comparison, using your actual income, go the 401(k) calculator at Beacon Capital Management Advisors.

READ: What should I know about annuities and retirement?

In any of these plans, you can use regular IRAs or 401(k)s, for tax-deferred contributions. If you’d rather skip the tax deferral in favor of tax-free withdrawals in retirement, choose Roth IRAs or Roth Solo 401(k)s. Low cost plans are available through no-load mutual fund groups such as Vanguard, Fidelity or T.Rowe Price, or discount brokerage firms such as Charles Schwab or TD Ameritrade.


Jane Bryant Quinn is a nationally known commentator on personal finance, with books and columns read and trusted by millions. In her long career, she has established herself as America’s most reliable voice for people trying to manage their money well. Read more of Jane's articles here