Retirement Plans for Self-Employed Workers | Capital Group

Retirement Planning

AUGUST 30, 2017

Self-Employed? Being Your Own Boss Means Taking Charge of Your Retirement Savings Plan

Whether you are self-employed or the owner of a small business, there is a wide range of retirement savings options designed to meet your specific needs. The options below can help you save money for retirement while potentially providing tax advantages.

For many American workers, being self-employed is no longer a pipe dream. In fact, there are approximately 15 million Americans who are self-employed — over 20% of them are baby boomers.1

Chances are if you're self-employed you may not be able to count on a 401(k) plan to help fund your retirement — nor an employer to contribute to your account. But as an independent worker or business owner, you can take charge by setting up a plan for yourself — and even for your employees.


SEP (Simplified Employee Pension) IRA enables small-business owners to save for their own retirement while also offering a plan to their employees. “I realized I wanted to make sure to offer some sort of retirement for my employees, and I wanted to make sure that my employees would be loyal and would want to stay with me," says independent attorney and American Funds investor Patricia Hernandez-Edelstein. “So we started a SEP plan.”

With SEP IRAs, you can contribute up to the lesser of 25% of your compensation or $54,000 toward your retirement savings. These contributions will be deducted from your self-employment compensation for the year, which means you will claim less earnings when tax season rolls around. 

Contributions are tax-deductible from your income filing, but withdrawals will be taxed down the road.

Hernandez-Edelstein says maintaining her SEP plan is easy. “Every year my accountant gets all my information regarding my books, he figures out what the maximum is that I can put in, then he calls and says, ‘Okay Patricia, you can put in X amount for yourself, and this is how much you can put in for your employees.’ Then basically I contact my financial advisor, he comes over, picks up a check and we get it all done.” 

For those small-business owners with employees, since only the employer makes contributions, those contributions can change annually, and contributions are not required. Additionally, there's minimal paperwork and no complex IRS reporting requirements.

Keep in Mind:

If you are a business owner with employees, you are considered an employee, too. That simplifies the process, but also means that whatever percentage of your salary you contribute for yourself must be the same as what you contribute for your employees.


If you’re a business owner with 100 or fewer employees and want to offer some kind of retirement plan (while also saving for your own retirement) then a Savings Incentive Match Plan for Employees of Small Employers (SIMPLE) IRA could be an appropriate choice.

The SIMPLE IRA is similar to a 401(k) plan, making it a great option for small-business owners who want to provide a retirement plan for their employees with less administration then a 401(k) plan and no complex IRS reporting requirements. Sunjay Kumar, a senior product specialist at American Funds, explains, “A common misconception about these plans is that they are too expensive to offer and too complicated to set up and administer. In reality since they are set up as individual accounts, there is little to no cost to the employer as each employee usually covers the cost to open their own account.” He adds, "Compared to a 401k plan, SEP or SIMPLE IRA plans are easier to set up and administer, and the plan’s financial advisor can help enroll and educate employees in the plan.”

If you’re looking for a low-cost retirement plan option to offer your employees that is easy to operate, then a SIMPLE IRA may be the way to go. However, keep in mind that the limits are lower — $12,500 annually, or $18,000 for those over 50 years old — than a SEP or 401(k). So, if you've been a late investor or are trying to catch up on your retirement savings, this might not be the best option. Also, withdrawals before age 59½ may incur a 10% penalty, or 25% if withdrawn in the first two years, along with being taxed as income. 

Keep in Mind:

With the SIMPLE IRA employees decide how much to contribute, and then the employer matches the dollar amount up to 3% or $12,500 annually per individual, with a $3,000 catch-up option for those over 50 years of age. During leaner business years, the business owner can reduce the match to as little as 1%, but for no more than two of every five consecutive years. Rather than matching, employers can choose to make a 2% nonelective contribution for each eligible employee.

A Traditional or Roth IRA

If you're simply a self-employed individual without staffers, consider opening either a Traditional or Roth IRA. Generally, any individual — self-employed or not — can contribute to an IRA. There's a $5,500 maximum annual contribution limit, with an extra $1,000 catch-up contribution available if you’re over 50 years old.

If you're a young person just beginning a career, you're likely to be in a lower tax bracket. A Roth IRA can be a good savings option for those who expect to be in a higher tax bracket in the future since you already paid taxes on your contributions and won't be taxed when you withdraw those assets. Also, earnings that have compounded over the years are generally tax free at the time of withdrawal, and you can continue to make contibutions to your IRA even if you enroll in an employer-sponsored plan in the future.

Traditional and Roth IRAs can be good options for self-employed people who are starting out because they provide the opportunity to put some money away for retirement without the additional responsibility and commitment that comes with some other retirement plans. If you choose to go with a Traditional IRA, you may get some tax breaks as well.

Keep in Mind:

Roth IRAs have income restrictions as to how much you can contribute, and Traditional IRAs have restrictions as to how much you can deduct. Additionally, you must wait at least five taxable years before making tax-free withdrawals from a Roth IRA. Meet with a financial or tax professional to discuss which plan might be best for your situation.

A Solo 401(k) Plan

You may have heard of a Solo 401(k), also known as an Individual 401(k) or a One-Participant 401(k). It's a retirement plan for self-employed people, and their spouse, who want to save the same amount as if they were enrolled in a company's 401(k) — up to $54,000 annually. 

There is generally no annual IRS Form 5500 filing requirement unless plan assets exceed $250,000 at year end. If plan assets exceed $250,000, you will need to file a short information return with the IRS (Form 5500-EZ).

Keep in Mind:

While a Solo 401(k) plan allows for potentially larger savings, it may also create more paperwork and have greater administrative responsibilities. However, if you expect to add employees in the future, it may be worth considering a different retirement savings plan option.

If you’d like additional information on retirement plans, we have resources that can help.

1U.S. Bureau of Labor Statistics

*All figures are as of 2017.

Investments are not FDIC-insured, nor are they deposits of or guaranteed by a bank or any other entity, so they may lose value.

Investors should carefully consider investment objectives, risks, charges and expenses. This and other important information is contained in the fund prospectuses and summary prospectuses, which can be obtained from a financial professional and should be read carefully before investing. 

This content, developed by Capital Group, home of American Funds, should not be used as a primary basis for investment decisions and is not intended to serve as impartial investment or fiduciary advice.