Self-Employed Retirement Plans: Everything You Need to Know!

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Retirement plans for self-employed individuals can be confusing if you don't know what to look for. Here's everything you need to know about your options.

Self-employed retirement plans are not the most sexy or exciting topic, I know. 🙂 As we’ve looked at our retirement planning options are over the past few years I want to share what I’ve learned so you’re not leaving money on the table. I don’t know about you, but I hate paying more than I have to for something – especially if that extra money ends up going to Uncle Sam. We pay enough in taxes and I want to do what I can to mitigate that as much as possible.

Many of my readers freelance on the side or run their own full-fledged small business. If you’re the former you likely have a retirement plan through your employer and so the thought of using the money you earn from your side income to save extra for retirement might not cross your mind, but it should.

If you’re the latter, it’s all on you. Don’t let your busyness hold you back from saving for retirement. When you work for yourself, not really shocking, everything is on you. You lose out on the framework an employer provides to save for retirement through a 401(k). You also lose out on the free money available through a match.

Personally, I don’t miss the free money that much as we’re able to save more now than when I was in the traditional workforce. The point, however, is you don’t want to put off saving money for retirement as it’ll only hurt you in the long run. It can also hurt you in the short run as it can potentially help save money on taxes.

Self-Employed Retirement Plans: They’re Not All Equal


We all know about Roth and Traditional IRA account options. They’re both helpful tools in retirement planning, but you likely also want the ability to put away more than $5,500 (the current contribution limit) per year. Thus, you want to start looking at what self-employed retirement plans you can open. For our purposes, we looked at three account types (SEP IRA, Solo 401(k) and SIMPLE IRA). There are other self-employed retirement accounts, though the ones we considered are the most common.



When we first started our business we chose to invest through a SEP IRA at Scottrade. Most online brokerages offer SEP IRA accounts, with Betterment also recently joining them. There are a few things that make a SEP IRA worthy to consider.

The most important aspect is the amount you can contribute. The IRS allows you to contribute up to 20% of your net adjusted annual self-employment income or $52,000, up to a compensation of $265,000.

Since a SEP IRA operates very much like a Traditional IRA, you get the tax deduction in the current year. The other beauty with a SEP IRA is that you can invest in virtually anything you want through most brokerages, including individual stocks, mutual funds, options, etc., depending on the broker.

There are two drawbacks to the SEP you may want to consider. First, if you ever plan to add an employee in the future you must make the same contribution to all non-contract workers. The other main drawback is you likely won’t be able to invest as much in a SEP as you would a Solo 401(k). We made the mistake of staying in a SEP, which meant we had several years we could’ve contributed more but were held back by having a SEP IRA.

Solo 401(k)


We just moved to having a Solo 401(k) for the 2015 year, as we wanted the ability to save as much as we can. A Solo 401(k) is very much like a 401(k) you’d have through a traditional employer. The IRS allows you to set aside $18,000 (as of 2015) per year as the employee of your business. You’re also able to potentially set aside an additional 25% of your income from the employer side of your business.

So, for example, if you run your own business and set a salary of $100,000 you could potentially save an additional $25,000 per year for retirement. Of course, there may be some things that might alter that amount. That notwithstanding, a Solo 401(k) is a great option to really maximize saving for retirement as a freelancer.

There are two main drawbacks with a Solo 401(k) you must consider. First, not every online broker offers Solo 401(k)s, especially smaller ones. Second, some online brokers will charge some sort of administrative fee to hold your Solo401(k). These fees can be anywhere from several hundred dollars to $1,000. You might also need a Solo 401(k) plan document, which will be an additional charge as you need someone to draw that up for you. The route we chose got us out all of these fees. More on that later.

One important thing to keep in mind with the Solo 401(k) is you must have these accounts open by December 31st to be able to contribute to them for the current year. We made the mistake of letting that slip by us last year and it cost us additional savings. I should also note that Solo 401(k)s are only for businesses with no employees. So, if it’s just you or you and a spouse you can open a Solo 401(k). If you have someone else on staff this retirement plan is not for you.



The final self-employed retirement plan to look at is the SIMPLE IRA. A SIMPLE is not truly for self-employed individuals or freelancers as it’s really suited for small businesses with less than 100 employees. It allows both the employer and employee to put aside money. That aside, some self-employed individuals may consider this route.

The IRS allows for a contribution of $12,500 in a SIMPLE for 2015. Generally speaking, this is going to be the lowest amount of the three major self-employed retirement plan options. Employers are also required to make some sort of matching contribution, which is nice to see.

The main drawback to the SIMPLE is obviously the lower contribution limits. They’re also not available at every online broker, though are more common to be found than Solo 401(k) plans. One other small thing to consider, most online brokers do not allow for electronic deposits to SIMPLEs as both employers and employees can contribute funds. That may not matter to you, though most investors I encountered as a stockbroker hated having to mail in checks.

Where Can You Open a Self-Employed Retirement Account?


As I’ve said throughout, we were saving for retirement through a SEP IRA for several years. They worked relatively well for us though I was disappointed to find out we were leaving money on the table. I was determined to change that going forward and wanted to move to a Solo 401(k).

There was a slight problem though, not every broker offers them and they can often be full of fees. Some brokers also require Solo 401(k) plan paperwork, some do not and simply have their own paperwork to be filled out to set up the plan. If you have to provide your own paperwork that can cost upwards of $1,000 or more. I did not want to pay that.

We held our SEPs at Scottrade, as we did most of our other investments. The rub – Scottrade charges $1,000 per year to hold a Solo 401(k). I was not willing to pay that. So, I went to research where we could have a Solo 401(k) and not pay such an exorbitant fee.

My research led us to Vanguard. In fact, we ended up moving all of our investments to them.

Outlined below is what I found for self-employed retirement account plans

Scottrade: As I mentioned, Scottrade charges $1,000 to be the custodian of a Solo 401(k). Once all your paperwork is completed you are then able to invest in anything Scottrade offers. Beyond the Solo 401(k), Scottrade also offers SEP and SIMPLE IRAs. Regardless of the account type, you pay the same flat $7 per trade commission.

Etrade: Etrade, as opposed to Scottrade, does not charge you to any type of fee to have a Solo 401(k). You complete the paperwork and you’re able to invest in anything Etrade offers. Like Scottrade, Etrade also offers SEP and SIMPLE IRAs. Etrade has recently updated their commission to a more competitive $6.95 per trade.

Schwab: After looking at the above two it was obvious I’d want to look at one of the bigger online brokers for our needs. My first stop was Schwab. I was pleasantly surprised to find Schwab does not charge for Solo 401(k) plans. Again, you fill out the paperwork and you’re good to go and can invest in anything they offer. Schwab also offers SEP and SIMPLE IRAs. The commission at Schwab is a competitive $8.95 per trade.

Fidelity: Fidelity, like Schwab, does not charge for Solo 401(k) plans. You fill out the paperwork and you can invest in anything they offer. Fidelity also offers SEP and SIMPLE IRAs and you pay a flat $7.95 per trade.

Vanguard: My final stop for our retirement needs led me to Vanguard. Vanguard has the best retirement plans available for self-employed individuals in my opinion. You can either bring in your own plan documentation or fill out their paperwork. I went with the latter option as it works just fine and was pretty straightforward. The Solo 401(k) plan at Vanguard is a little different.

They only allow you to invest in a little over 100 Vanguard mutual funds. While that might seem limiting, the funds are typical Vanguard funds – very low-cost and a great selection. One thing to keep in mind is Vanguard will charge $20 per year per fund you’re in.

There is a way around it though – if you have at least $50,000 invested in other Vanguard products (ETFs or mutual funds) outside the Individual 401(k), the fee is waived. We fell into that category, which made the switch to Vanguard the right choice for our family. As with the other players, Vanguard also offers SEP and SIMPLE IRAs.

Retirement plans for self-employed individuals can be confusing if you don't know what to look for. Here's everything you need to know about your options.

Make the Decision That’s Right for You, But Act!


Your situation very likely is different than mine and vice versa. There are many things to consider when looking at self-employed retirement plans. Take it seriously and consult with a tax professional to determine what’s best for your tax situation. The last thing you want to do is make a careful, fastidious decision and have it turn out to be the wrong one because you didn’t have all the information.

That being said, don’t let time go by on your decision, especially as we near year-end. Not only will the increased time in the market help you from an investment perspective, it can also help significantly from a tax perspective. If you’re considering a Solo 401(k) keep in mind the amount of time it will take to fill out the paperwork. The paperwork at Vanguard was somewhere between 30-50 pages and took a week or two to get approved. Again, do what’s best for you and start putting all the money away you can. 🙂


Are you self-employed – what retirement plan do you use? How do you balance saving for retirement while running your business? What challenges have you faced in saving for retirement?


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John is the founder of Frugal Rules, a dad, husband and veteran of the financial services industry whose writing has been featured in Forbes, CNBC, Yahoo Finance and more.

Passionate about helping people learn from his mistakes, John shares financial tools and tips to help you enjoy the freedom that comes from living frugally. One of his favorite tools is Personal Capital , which he used to plan for retirement and keep track of his finances in less than 15 minutes each month.

Another one of John's passions is helping people save $80 per month by axing their expensive cable subscriptions and replacing them with more affordable ones, like Hulu with Live TV.

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  • Natalie @ Financegirl says:

    So, I think this just helped me study for the CFP exam!! 😉

  • Holly@ClubThrifty says:

    We have a SEP IRA but we’re switching to a Solo 401(k) next year for the reasons you’ve mentioned. I plan to use Vanguard because that is where all of our investments are. I should probably get on that!

  • Emily @ JohnJaneDoe says:

    That’s a really good summary! One of my goals next year is to set up a plan, and this is a great resource for the various resources. Thanks, John.

  • Tonya@Budget and the Beach says:

    Saving for retirement was always the biggest hurdle I had as a self-employed person. I just wasn’t making enough and believe me when I say I cut back in every way possible. But, if you can do it then it just takes a tiny bit more discipline than when you are full time. But it’s crucial! So great info!

    • John Schmoll says:

      I agree, it’s a hurdle for us at times as well. When you start looking at clients taking months to pay you don’t know what your cash flow will be so it’s tempting to hold back.

  • Kim@Eyesonthedollar says:

    I have a solo 401(k) for all the reasons you listed. It’s kind of like going with a self hosted blog; maybe a little harder to set up but it gives you much more room to grow over time. The retirement options are one of the great things about being self employed.

  • Shannon @ The Heavy Purse says:

    Great summary, John. I think many self-employed individuals or small business owners don’t realize that they actually have some very good options to save for retirement. I know from a client perspective they like to see almost unlimited fund choices, but the truth is that is so overwhelming and makes it incredibly difficult to pare down the list. I’d rather have a handful of well-managed and consistently solid performing funds to build my portfolio around. Sounds like you made a great choice for your situation!

    • John Schmoll says:

      Thanks Shannon! That’s a good point – generally I like to see more options, though we want simplification and a core group of funds to choose from.

  • Michelle says:

    I actually have a phone call today about switching to a Solo 401K from my SEP. Was it hard to switch from your SEP?

    • John Schmoll says:

      Good timing then. 🙂 We actually chose to open a separate Solo 401k plan altogether. From what I remember, it is possible to roll the SEP into the Solo, though that causes potential (though I could be wrong) issues due to co-mingling of funds. We have both in very similar funds so it keeps it pretty simple to manage.

  • DC @ Young Adult Money says:

    I think self-employed people really get the worst of both worlds when it comes to benefits. They pay higher taxes and saving for retirement isn’t as automated/easy as when you are employed. Of course there are a long list of benefits of being self-employed, but it’s unfortunate how complicated self-employment can be from a retirement perspective.

    • John Schmoll says:

      Yes, there are definitely benefits you give up by being self-employed. That being said, I don’t think saving for retirement is really any more difficult as a self-employed individual. Yes, we give up the match (assuming there would be one available) but there are quite a number of opportunities out there to save for retirement. The underlying key, in my opinion, is seeing the need to actually save.

  • Yetisaurus says:

    Great post! My very small employer doesn’t offer a retirement plan, so for years I’ve just been putting money in a Roth. Until my income got too big, that is.

    Last year I finally did the homework of researching different retirement vehicles for my side hustle income. Your research went even a little further than mine did. 🙂 Anyway, I set up my solo 401k with Fidelity and it’s been great! It was super easy to set up and I love the zero fees and the virtually unlimited investment options.

    In the next year or so, after I make partner in our small firm, I hope to nudge the other partners into setting up a retirement plan. Fingers crossed!

    • John Schmoll says:

      Thanks for stopping by Yetisauras. Sorry to hear you don’t have access to a Roth, though it’s obvious you’ve done all you can to make up for that.

      That being said, nice move to Fidelity – I strongly considered them for our Solo 401(k) plan. Best wishes on moving the partners to setting up some sort of retirement plan.

  • Shannon @ Financially Blonde says:

    This is an awesome post John!!! I am still in the process of committing more capital to the business than retirement now, but next year I am going to open up one of these. I am talking to my CPA soon about his thoughts. There are many downsides to having your own business but I think retirement plan options is one of the great upsides that you shouldn’t neglect.

    • John Schmoll says:

      Thanks Shannon! It makes sense that you’d make that move to continue to put more into the business – I’d do the same thing myself. 🙂

  • Tyler @ Oddball Wealth says:

    Thanks for the informative post! As I’m slowly planning to make the switch from being an employee to self-employment, I’ll have to make the decision on how to set up and switch my retirement accounts.

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