This guide shows self-employed earners how choosing the right IRA can help avoid leaving tens of thousands of dollars on the table and why a SEP IRA might be the smartest choice for maximizing retirement savings.
Building Retirement Security on Your Own
While self-employment gives you the freedom to run your business your way, it also leaves you flying solo on retirement planning. Without an employer-sponsored 401(k) to fall back on, building your retirement future is entirely in your hands.
The good news? IRAs (Individual Retirement Accounts) let you save for retirement while earning valuable tax benefits. The challenge? Choosing the right one can mean the difference between contributing $7,000 or $70,000 annually, and that gap compounds to hundreds of thousands of dollars over your career.
Here's how to pick the right IRA for your situation and maximize your tax benefits.
Your Three Main IRA Options
If you're self-employed, you have three solid choices: Traditional IRA, Roth IRA, and SEP IRA. Each offers retirement-saving advantages, but the best fit depends on your income level, business structure, and how much you want to contribute annually.
If you’re just getting started or recently left a corporate job, then a Traditional or Roth IRA might cover your needs perfectly. But, if you’re running an established business or are earning a solid income, then a SEP IRA often emerges as the clear winner, allowing you to contribute significantly more than traditional options.
Now, let’s break down each option so you can make the right choice for your situation.
Traditional IRA and Roth IRA: Simple and Familiar
If you’re new to self-employment or are still building a steady income, traditional and Roth IRAs are great starter options. They’re easy to open, require no special filing with the IRS, and are available to you whether or not you have employees.
Contribution Limits
In 2025, you can contribute up to $7,000 to a Traditional or Roth IRA, or $8,000 if you're age 50 or older (thanks to the catch-up contribution rule).
Tax Benefits
- Traditional IRA: Contributions may be tax-deductible depending on your income level and whether you have access to a workplace retirement plan. Your investments grow tax-deferred until you withdraw the money in retirement.
- Roth IRA: You contribute with after-tax dollars, but enjoy tax-free growth and withdrawals in retirement, which can be ideal if you expect to be in a higher tax bracket down the road.
When a Traditional IRA Might Be a Better Fit for the Self-Employed
Consider a Traditional IRA if:
- You want something easy to set up and manage: No business forms or employer plans needed. Just open an account, make contributions, and you’re on your way.
- You’re still building a steady income: If you’re not ready to contribute large amounts, a Traditional IRA lets you start small and grow over time, while potentially reducing your taxable income now.
- You’re rolling over an old 401(k): A Traditional IRA is a natural destination for an old 401(k), allowing you to consolidate your savings without triggering taxes.
- You want current tax deductions: Traditional IRA contributions can reduce your taxable income today, which is especially valuable if you're in a higher tax bracket now than you expect to be in retirement.
When a Roth IRA Might Be a Better Fit for the Self-Employed
Consider a Roth IRA if:
- You want tax-free retirement income: Since you pay taxes upfront, all withdrawals in retirement are completely tax-free, including decades of investment growth.
- You're in a lower tax bracket now: Since Roth contributions are made with after-tax dollars, paying taxes now may be more beneficial if you expect a higher income and higher taxes later.
- You want simplicity and flexibility: Roth IRAs are also easy to open and manage, and you can withdraw your contributions (but not earnings) at any time without penalties.
- You qualify based on income: If your income is under $150,000 (single) or $236,000 (married filing jointly), you may be eligible to contribute to a Roth IRA, which offers tax-free growth and withdrawals later on.
Real-World Example:
Mike, a freelance web developer earning $45,000 annually, chose a Roth IRA because he expects his income to grow significantly as his business expands. By paying taxes now on his $7,000 contribution, he'll avoid taxes on potentially hundreds of thousands in growth when he retires.
For example, if that $7,000 is invested wisely with an average 7% return, the $7,000 could multiply significantly before retirement, and qualified withdrawals would be tax-free.
Keep in Mind
- Traditional IRAs come with Required Minimum Distributions (RMDs) starting at age 73.
- Roth IRAs don’t have RMDs and your money can grow for as long as you want.
- High earners who can’t contribute to a Roth IRA directly may use a backdoor Roth by contributing to a Traditional IRA and converting it.
But what if you're ready to contribute more than $7,000 - $8,000 per year? That's where the SEP IRA shines.
SEP IRA: Built for the Self-Employed
If you're running your own business full-time and want to save more than the typical IRA limit, a SEP IRA (Simplified Employee Pension) could be your best friend. Think of it as a retirement plan designed specifically for self-employed individuals or business owners who don’t have access to a traditional 401(k). It lets you make much larger contributions and still keeps things simple.
Contribution Limits
In 2025, you can contribute up to 25% of your net earnings from self-employment, up to $70,000, nearly 10x what you can put into a Traditional or Roth IRA.
Important calculation note: For self-employed individuals, SEP IRA contributions are based on net earnings from self-employment, and the IRS uses a special formula to calculate compensation. Because your contribution reduces your compensation, the effective limit is approximately 20% of your net income before adjustments.
There are no catch-up contributions for those over 50, but with such a high limit, many business owners may not even need it.
Tax Benefits
- Contributions are tax-deductible.
- Money grows tax-deferred, meaning you don’t pay taxes until you withdraw funds in retirement.
- Great for reducing your current taxable income, especially during high-income years.
Here’s When a SEP IRA May Be a Better Fit for the Self-Employed
Here’s why it might be the right move:
- You want to put away more than the IRA limit: A SEP IRA lets you save up far more than the limit on Traditional or Roth IRAs. It’s a useful way to boost your savings during high-earning years.
- You're self-employed and working solo: If you’re self-employed and working solo, a SEP IRA could be a great fit. It’s designed for freelancers, consultants, and contractors, offering easy setup and minimal paperwork.
- Your income isn’t the same every year: Because contributions are optional, you can save more in good years and skip them in slower ones, giving you flexibility that fits your business.
- You want to lower your taxable income: Contributions are tax-deductible, which may help reduce your overall tax bill when your income is high.
- You’re looking for a way to grow retirement savings quickly: With high contribution limits and simple rules, a SEP IRA can help you build up your retirement savings faster than standard IRAs, especially if you’re earning more.
Real-World Example:
Sarah, a freelance marketing consultant earning $100,000 annually, was contributing $7,000 to a Traditional IRA. By switching to a SEP IRA, she can now contribute up to $18,587 (roughly 20% of her net self-employment income, after accounting for deductions).
Because SEP IRA contributions are tax-deductible, increasing her contribution by $11,587 (from $7,000 to $18,587) could save her over $2,780 in federal taxes each year, assuming she's in the 24% marginal tax bracket.
Keep in Mind
If you have employees, SEP IRAs require you to contribute the same percentage of pay to eligible employees as you do for yourself. So if you give yourself 20%, you’ve got to give your team 20% too. That’s generous, but not always affordable for every small business.
Your Self-Employed Retirement, Made Simple
Choosing the right IRA when you’re self-employed can help you maximize your retirement contributions and grow your long-term savings more efficiently. A SEP IRA is a powerful option, letting self-employed professionals save more than a standard IRA while keeping retirement planning simple.
If you want a straightforward, flexible way to save more with higher contribution limits on your own terms, PensionBee’s SEP IRA (available exclusively for sole proprietors) could be the retirement solution your business needs. With five investment portfolios built using ETFs powered by State Street, you benefit from institutional expertise without the complexity. You can start fresh with tax-advantaged savings and even roll your old retirement accounts, like 401(k)s or IRAs, into one place. This gives you a clear view of your savings and helps you confidently plan your next steps. Plus, our dedicated account managers, called BeeKeepers, guide you every step of the way, so you can focus on the retirement you deserve.
Frequently Asked Questions (FAQs)
1. Can I have both a SEP IRA and a Traditional/Roth IRA?
Yes, you can contribute to both a SEP IRA and a Traditional or Roth IRA in the same year.
However, each account has its own contribution limit:
- For SEP IRAs: Employers can contribute up to 25% of your compensation or $70,000 for 2025 (whichever is less).
- For Traditional and Roth IRAs: You can contribute up to a combined total of $7,000 ($8,000 if you're 50 or older) in 2024.
Keep in mind, your ability to deduct Traditional IRA contributions or contribute to a Roth IRA depends on your income and whether you're considered covered by a retirement plan at work and yes, a SEP IRA does count as such a plan.
2. How is a SEP IRA different from a Traditional IRA or a Roth IRA?
SEP IRAs have much higher contribution limits ($70,000 instead of $7,000 for other IRAs), which can make them a good choice for self-employed workers. Additionally, Traditional IRAs are funded with pre-tax dollars, while Roth IRAs are funded with after-tax dollars, offering tax-free growth and withdrawals under certain conditions. SEP IRAs have similar tax treatment to Traditional IRAs.
3. Can I skip contributions in some years?
Yes, this is where SEP IRA shine. SEP IRA contributions are completely flexible. You can contribute different amounts each year or skip years entirely based on your business performance.
4. What do I need to know about contributions?
If you're a sole proprietor with no employees, you can contribute up to $70,000 or 25% of your adjusted compensation in 2025, whichever is less.
For self-employed individuals, the IRS uses a special calculation to figure out adjusted compensation. In this case, your adjusted compensation is your net earnings from self-employment, minus:
- One-half of your self-employment tax, and
- The amount you contribute to your own SEP-IRA.
- This adjusted figure is what your SEP IRA contribution limit is based on.
(Note: Because your contribution also reduces your compensation, the math works out so that your maximum contribution is effectively about 20% of your net business income before adjustments. This is a helpful shortcut when estimating how much you can contribute.)
For Example: If you're a sole proprietor with $200,000 in net business income for 2025, your SEP IRA contribution won’t be a straight 25% of that amount.
The IRS requires you to first adjust your income by subtracting:
- Half of your self-employment tax, and
- The SEP contribution itself.
After using the IRS formula, your adjusted compensation comes out lower, so your maximum SEP IRA contribution would be around $40,000—which is roughly 20% of your original net income.
That’s still significantly more than the $7,000 contribution limit for a Traditional IRA, and it's a useful way for self-employed individuals to boost retirement savings.
5. What if I hire employees after setting up my SEP IRA?
You must include all eligible employees in your SEP IRA plan and contribute the same percentage of their compensation as you do for yourself. This is why many business owners with employees choose Traditional or Roth IRAs instead.
6. When do Required Minimum Distributions (RMD) begin?
Roth IRAs don't require Required Minimum Distributions (RMD). However, Traditional IRAs and SEP IRAs come with them. That means once you hit a certain age (usually 73), you’ll need to start taking a minimum amount out of your account each year. Why? The IRS wants to make sure those tax-deferred savings eventually get taxed, so you can’t leave the money growing in your account forever. Missing an RMD can lead to penalties, so it’s important to know when you’re required to take one and how much to withdraw.
