Retirement Planning for the Self-Employed: What Advisors Should Know

One of the main goals that financial advisors help their clients with is planning for retirement.

Financial advisors help their clients evaluate options based on different factors, such as where the clients want to live, projected living expenses, income tax rates and goals that the client would like to accomplish during retirement. Those goals may include gifting, travel and purchasing large-ticket items like a new home.

Retirement planning can be even more challenging for self-employed clients because they typically carry the burden of saving for retirement completely on their own. That’s because they do not have an employer that can offer matching 401(k) contributions, a pension or other retirement benefits.

Financial advisors can play a crucial role in helping their self-employed clients maximize their retirement strategy by helping them early on with choosing the best retirement plan option for their business. Financial advisors can also help their small-business owner clients evaluate the different types of retirement plans that are available to them and help them choose the best option based on several factors such as the number of employees the client has, their expected level of income and tax bracket, and the administrative burden and costs to establish and maintain the retirement plan.

Below are some of the most common retirement plan options that advisors can help their self-employed clients navigate. They can accomplish this by helping them understand their various features, such as tax benefits and contribution limits.

— Traditional or Roth IRA

— Solo 401(k)



— Profit-sharing plans, money purchase plans and defined-benefit plans

[SUBSCRIBE: Get the weekly U.S. News newsletter for financial advisors. ]

Traditional or Roth IRA

Although traditional and Roth individual retirement accounts, or IRAs, are not specifically designed for the self-employed individual, they are still a great option to consider.

One of the features a self-employed client can take advantage of is the deduction of the contribution itself. For example, a single person who is not covered by a retirement plan at work, or is married and the spouse is also not covered by a retirement plan at work, can make a fully deductible contribution to a traditional IRA regardless of their modified adjusted gross income. That deductible contribution is subject to the limits of $6,000 per year and $7,000 if age 50 or older.

Solo 401(k)

As the name suggests, these plans are available for individuals who are self-employed and have no employees. It’s also known as a one-participant 401(k) plan.

One exception is the spouse can contribute if they are employed by the business. If so, they can contribute up to the standard contribution limits, plus the employer can also add employer contributions up to the maximum limits.

For 2022, an employee can contribute a $20,500 standard contribution and an additional $6,500 catch-up contribution for those ages 50 and older. The total contribution limit between employer and employee is $61,000 plus the additional $6,500 catch-up contribution. This gives a married couple that is self-employed the ability to save twice as much.

[Read: Divorce Planning: What You Need to Know as a Financial Advisor]

As a business owner, the individual is considered both employer and employee. The owner can make plan contributions as both, subject to contribution limits and income limits.

For example, a client who has an S-corporation can contribute up to 100% of her salary as an employee and up to 25% of compensation as the employer.

A sole proprietor who files a Schedule C has to calculate the amount allowed using a special calculation, which is 25% of net self-employment income, calculated as net profit minus half of self-employment tax and the plan contributions made for themselves.

An advantage of solo 401(k)s is that they can offer a Roth option. This means that as the employee, your client can contribute much more than they could to a Roth IRA, and this can provide for a great planning opportunity for financial advisors and their clients.

The compensation limit that is used to factor the contribution limit is $305,000 in 2022. Keep in mind that these limits are per person, not per plan, so if your client is an employee of another business and has their own business on the side, the limits apply as a combined limit for both plans.

Once the plan balance reaches $250,000 or more, solo 401(k)s have an additional administrative burden. Form 5500-EZ is required to be filed annually.


Simplified employee pensions, or SEPs, have similar contribution and compensation limits to solo 401(k)s. Two differences, however, are that there is no catch-up contribution allowed for those ages 50 or older and there is no Roth option.

Another difference is that it can be used by small-business owners with employees. However, employers must contribute an equal percentage of salary for each eligible employee, which can be costly to the employer. SEPs are easier to maintain since there is no annual reporting requirement to the IRS and contributions do not have to be made every year.


Savings incentive match plan for employees, or SIMPLE, IRAs are set up by the employer and allow both employers and employees to contribute, though the contribution limits are lower than solo 401(k)s and SEPs.

In 2022, up to $14,000 can be contributed plus a $3,000 catch-up contribution if the client is age 50 or older.

If the individual contributes to another employer plan, the total cannot exceed $20,500. As the employer, your client can deduct the employee contributions as a business expense. However, it can be costly because employers are generally required to make contributions to their employee accounts, either matching contributions up to 3% or fixed contributions of 2% to all eligible employees. If the 2% option is chosen, the employer must contribute even if the employee does not. The same compensation limit of $305,000 applies in 2022.

Profit-Sharing Plans, Money Purchase Plans and Defined-Benefit Plans

For self-employed clients who are higher earners and can afford to save even more for their retirement, other great options include profit-sharing plans, money purchase plans and defined-benefit plans.

These can be established in addition to other retirement plans but they are costlier to maintain and have a higher administrative burden due to IRS testing, annual filing requirements and hiring an actuary.

More from U.S. News

5 of the Top Independent Broker-Dealers for Financial Advisors

Advisors: 7 Tips to Make Your Practice Multigenerational

Rising Rates Are an Opportunity for Financial Advisors

Retirement Planning for the Self-Employed: What Advisors Should Know originally appeared on

Related Categories:

Latest News

More from WTOP

Log in to your WTOP account for notifications and alerts customized for you.

Sign up