The gig economy burst into the mainstream during the COVID-19 years, but it has built a new resiliency in 2025. While freelance work was previously a hustle culture, professionals today are finding it to be a true work alternative enabling them to craft a career without regard to geographical boundaries, traditional working hours and corporate expectations.
If you’re one of the growing number of independent contractors, retirement planning can sometimes seem daunting given the lack of access to a traditional workplace benefits like a 401(k). Fortunately, there are numerous tax-advantaged options available to 1099 workers to help build long-term financial stability.
While it’s possible to manage retirement planning independently, working with a team of financial and tax advisors can significantly impact long-term savings. Their expertise often justifies their fees through tax savings and strategic planning. Fortunately, high-quality financial advice is now more accessible, even for those with limited funds. It’s essential to ensure that all your advisors collaborate effectively to provide a comprehensive financial picture.
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Your role is to successfully kick off this planning. You should come to the table with the information to create a cash-flow statement. This includes the details for all inflows and accounts payable, as well as outflows such as housing, utilities, insurance and other recurring costs. Tracking just a few months of financial data will reveal income fluctuations and highlight periods when setting aside money for retirement is more feasible. Advisors can then help determine eligibility for tax-advantaged retirement plans, where significant savings may apply.
The IRS imposes strict eligibility criteria for retirement plans. Independent contractors may not be eligible, or the allowable contribution may be reduced if they also have W-2 employment or a spouse that has access to a retirement plan. Tax laws evolve frequently, so consulting a professional tax advisor is crucial to stay compliant and maximize benefits. Artificial intelligence may not keep up with the rapid pace of tax code changes, making expert guidance even more essential.
The SECURE 2.0 Act introduced several new provisions, including penalty-free withdrawals in certain situations such as:
— Domestic violence survivors.
— First-time homebuyers.
— Individuals certified as terminally ill.
— Residents of federal disaster areas.
— Qualifying birth or adoption expenses.
These changes provide financial flexibility in times of crisis, but they should be evaluated carefully within a broader retirement strategy. The act also increased the complexity of contribution requirements and limitations, so consulting with professional advisors is highly advantageous.
Overall, retirement plan options for 1099 workers have grown significantly, and each has its distinct advantages and limitations. Once your business is profitable enough to set aside funds, here is a list of popular options:
— Traditional individual retirement account (IRA).
— Roth IRA.
— Simplified employee pension (SEP) IRA.
— Savings incentive match plan (SIMPLE) IRA.
— Solo 401(k).
— Health savings account (HSA).
— Defined benefit plan.
Traditional Individual Retirement Account (IRA)
Anyone with earned income can establish a traditional IRA and make tax-deductible contributions. So, if you put the $7,000 limit for 2025 into an IRA ($8,000 for those age 50 or older), your taxable income for the year decreases by that amount as long as you don’t have an employer-sponsored retirement plan. If you are married and filing jointly with a spouse who has an employer-sponsored plan, you can still make the full deduction if your modified adjusted gross income doesn’t exceed $236,000.
Funds grow tax-deferred, meaning you won’t pay taxes on earnings until you withdraw them. Retirement distributions will be taxed at your ordinary income tax rate for that year. Additionally, distributions made before age 59 1/2 will be subject to a penalty. Traditional IRAs have required minimum distributions (RMDs) beginning at age 73. Even if you do not need the money, you must take a distribution to avoid a substantial penalty. RMDs are calculated using both the person’s life expectancy and the IRA account balance.
Roth IRA
This account allows the full contribution limit for singles whose 2025 modified adjusted gross income is less than $150,000 (limit is reduced between $150,000 and $165,000); married couples who file jointly can make at least a partial contribution if their income is under $246,000 (full contribution limit is $236,000).
While contributions to a Roth IRA are not tax-deductible, its high appeal to self-employed participants is that earnings will grow tax-deferred and retirement income from the account will be tax-free. In 2025, if you are less than 50 years old, the maximum contribution is $7,000. Older investors are eligible for an additional catch-up contribution of $1,000, for a total of $8,000.
Under the new provisions in the SECURE 2.0 Act, you may be able to contribute to your Roth IRA with rollover 529 plan assets. This rollover option is not available for traditional IRAs.
Simplified Employee Pension (SEP) IRA
A SEP IRA can be set up for both the employer and the employees of a business to provide a valuable employee benefit. Employees cannot contribute their own money, but their withdrawals are still taxed as ordinary income. The maximum allowed contribution for 2025 is $70,000 or 25% of compensation, whichever is less. Sole proprietorships have a slightly lower limit of 20% of net earnings.
While SEP plans are easy to set up and administer, owners must contribute the same percentage to all their employees as they contribute to their own plan. Like traditional IRAs, withdrawals are taxed as ordinary income and subject to both early withdrawal and RMD rules.
The SECURE 2.0 Act allows employers, at their discretion, to offer employees the option to designate SEP IRA contributions as Roth (after-tax) contributions. This means contributions are included in the employee’s taxable income in the year made but can be withdrawn tax-free in retirement under specified conditions.
Savings Incentive Match Plan (SIMPLE) IRA
SIMPLE plans vary from SEP plans in that they will allow a business owner’s employees to make contributions to their accounts, alongside employer contributions. Contributions are tax deductible, and this can result in a lower tax bracket overall. Business owners love SIMPLEs because they can offer a desirable employee benefit inexpensively without the need for plan administration services. Retirement income is taxed like a traditional IRA. The SIMPLE IRA employee contribution limit is $16,500 in 2025. There is also a $3,500 catch-up contribution available to workers who are age 50 or older.
In 2025, the SECURE 2.0 Act allows a new “super catch-up provision” for individuals who turn ages 60 to 63 before the end of the year. They can bump their catch-up contribution from $3,500 to $5,250. Once they reach age 64, their catch-up contribution reverts to the lower $3,500 contribution limit.
[READ: 6 Funds to Add to Your HSA]
Solo 401(k)
This plan, also called the one-participant 401(k) by the IRS, allows solo business owners to enjoy the benefits of a corporate 401(k). The plans are reserved exclusively for the owner (and their spouse, if applicable) who has no employees and earns a maximum of $350,000. In these plans, the business owner is considered both as the employer and the employee for contribution purposes.
As an employer:
— In 2025, you can contribute a maximum of $70,000 if you are under age 50.
— If you are ages 50 to 59, or age 64 or older, you can contribute an additional catch-up contribution of $7,500. Participants between age 60 to 63 can make contributions up to $81,250. Deductibility and income taxes upon distribution depend on whether the business owner selects a traditional plan or the Roth option. A plan administrator is needed, and those fees can add as much as $2,000 to the cost, depending on the provider.
— Employer contributions are made as an additional profit-sharing contribution. This contribution is 25% of either compensation or net self-employment income. The latter is calculated as net profit less half of self-employment tax and the plan contribution made as an employee.
As an employee:
— You can contribute a maximum of $23,500 in 2025, or 100% of compensation, whichever is less.
— A catch-up contribution of $7,500 is available to those 50 and older.
— As in the employer contribution, the Secure 2.0 Act introduced a new super catch-up contribution limit of $11,250 for individuals turning 60-63 before the end of 2025. These amounts will be indexed for inflation in future years, providing a significant boost to retirement savings.
Health Savings Account (HSA)
HSAs are the unsung heroes for self-employed people as they offer a tax-advantaged method to save for both medical expenses and retirement.
By pairing an HSA with a qualified high-deductible health plan (HDHP), business owners can accumulate funds to cover eligible health, dental, vision and pharmacy expenses. For 2025, an HDHP is defined as a health plan with an annual deductible that’s not less than $1,650 for self-only coverage or $3,300 for family coverage. The annual out-of-pocket expenses, such as deductibles and copayments, cannot exceed $8,300 for self-only coverage or $16,600 for family coverage.
There are no taxes on the contributions, the account growth or any distributions that pay for qualified expenses not reimbursed by the health plan provider. All contributions are vested, and assets are carried over at the end of the year.
An HSA cannot be set up if you have multiple health care plans, are enrolled in Medicare or if you can be claimed as a dependent on another person’s tax return. In 2025, the maximum HSA contribution is $4,300 for an individual and $8,550 for a family. HSAs are also eligible for a $1,000 catch-up contribution, although the qualifying age is a bit higher, at 55 or older.
Defined Benefit Plan
Defined benefit pension plans have been a cornerstone of retirement savings for decades, experiencing periods of fluctuating popularity depending on economic conditions. With inflation continuing to put pressure on interest rates, these plans are regaining traction as a valuable retirement strategy.
A defined benefit plan guarantees a steady income stream in retirement, offering significant advantages for business owners who can commit to consistent contributions over time. Higher contribution limits allow for substantial tax deductions, making this an attractive option, particularly for older business owners looking to accelerate retirement savings.
These plans can be complex, making them more expensive to administer. They require careful planning and adherence to strict funding rules, making them better suited for businesses with stable cash flow and a long-term commitment to employee benefits. A financial advisor is invaluable to determine if this is a viable option for a business and to recommend plan administration services.
The Takeaway
With more retirement options available than ever, 1099 workers face increased complexity when choosing the best plan for their business. A great certified public accountant (CPA), working alongside your financial advisor, can quickly help you select the best option. Beyond selecting the right plan, these professionals can help optimize tax savings by combining different strategies, such as implementing a backdoor Roth IRA, to maximize contributions and long-term tax benefits. Most importantly, they can also make sure that you truly qualify for a particular option, adhere to the appropriate regulations and take required distributions properly. With the right partner, you can keep your focus on growing your business while securing your retirement.
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Retirement Plan Options for 1099 Employees originally appeared on usnews.com
