Four Retirement Planning Considerations if You’re Self-Employed

Our lives have changed in innumerable ways since 2020, and one of the biggest impacts was how and where we work. This paradigm shift in how we conceptualize work has created more opportunities, leading to possibilities that many of us wouldn’t have considered before 2020. 

Why commute every day and give up wearing your comfy sweatpants when you could be your own boss, set your schedule, and determine your own hourly rate? 

There are many benefits to self-employment, like the ones I just mentioned. But it’s not all sunshine and rainbows. There are also unique challenges that people who work for a company don’t face. At the top of that list is the lack of employer-provided benefits. How should you approach your own health insurance? Should you lease an office, work from home, or bounce from coffee shop to coffee shop? And what should you do now that you don’t have a 401(k) and, if you’re fortunate, an employer who matches your contributions? 

While these are all important questions—and there are plenty more beyond them—I’m going to explore a key, long-term financial impact of self–employment: saving for retirement. 

There’s not one right way to save for retirement if you’re self-employed. As a financial advisor, I don’t believe in blanket advice because there are so many variables to consider, and each situation can be unique. So I’m not going to recommend one specific route. Instead, let’s explore four considerations that should be part of a holistic approach to saving and investing for your retirement. 

1: Build Short-Term and Intermediate Cash Reserves

Having extra money on hand is especially crucial for self-employed individuals, who often face fluctuating income and unpredictable expenses. Before you shift to retirement saving, you should first focus on the here and now, ensuring you have solid financial footing before moving to longer-term investments. 

Short-term reserves can serve as a financial safety net, allowing you to manage immediate costs such as equipment repairs, client payments that are delayed, or personal emergencies without resorting to debt. As is typically the case for personal emergency funds, you should have 3-6 months’ worth of business expenses on hand in a short-term fund. If you have especially volatile expenses, or you’re in a line of work with expensive, long-term assets like equipment, you should factor this into how much you set aside. 

Meanwhile, intermediate cash reserves are important for planning ahead, providing the funds needed for larger investments like business expansion or seasonal inventory. Intermediate funds can also be used to help with income smoothing for those who operate seasonal businesses and experience periods of higher income and periods of little to no income. 

By consistently setting aside a portion of your earnings into dedicated savings accounts, you create a buffer that not only enhances your financial stability but also gives you the confidence to seize new opportunities. This strategic approach empowers self-employed individuals to navigate the uncertainties of entrepreneurship while maintaining control over their financial future.

2: Manage Business and Personal Debt to Pay Off High-Interest Items First

When you’re self-employed, effectively handling both business and personal debt is critical, even though it may feel overwhelming. 

In the early stages of self-employment, you may be taking on debt instead of paying yourself (in fact, even self-employed financial advisors typically don’t begin making money for a few years). In this stage in particular, it wouldn’t make sense to save for retirement when the debt has a higher interest rate than the potential investment returns. You may not be able to pay everything at once, so prioritize paying off the highest-interest debts first, typically your credit cards. 

As part of this process of examining your debts, you should compile all of your debts and the interest rates to create a priority list. As you get extra funds, direct them in order of your priority list. Consolidating or refinancing may also help reduce interest rates and payments.

By addressing your debts before beginning to invest, self-employed individuals can set a solid foundation that is rooted in developing a pattern of stability for the years to come.

3: Understand Tax Implications and Burdens of Self-Employment 

For those who have already taken the leap of faith into self-employment, you know that taxes are nothing like they may have been when you were a normal 9-5 employee of a company. Not only are your taxes more complex and cumbersome, but you’ll likely end up paying more money in taxes than you’re used to (unless you’re making little to no money in profit, which is a different problem). 

There are several considerations within this realm of taxes alone. One of the key areas you’ll need to understand is quarterly estimated taxes. Unlike working for a company that withholds taxes on your behalf, when you’re self-employed, you’re the one who has to do the withholding. If you’re making a steady income that doesn’t fluctuate, this is relatively straightforward. But if you’re just starting out, or your income oscillates, you may have no idea how much to withhold. On top of that, for those with unsteady income, filing your tax returns becomes more difficult when your income isn’t consistent. A way to simplify this is by setting aside between a quarter to a third of each customer or client payment. If you don’t expect to make much in your first few years, you should be safe withholding 25%. But airing on the higher side is never a bad thing. 

On top of quarterly estimated payments, you also have to understand the self-employment tax itself. Your employer used to pay half of the taxes associated with Social Security and Medicare, and they withheld your half of those taxes. But when you’re self-employed, you owe all 15.3% yourself, referred to as self-employment tax. Now, half of this amount is deductible on your taxes, but that doesn’t make the payment itself less enjoyable. Even if you only make $30,000 in income after expenses, you’ll still pay $4,500 in self-employment taxes alone. 

This is a lengthier consideration, and there’s a lot more on this topic of taxes related to self-employment. Hopefully, these two items serve as a good starting point. 

4: Select a Retirement Investment Account Suited for Self-Employment

The final consideration as part of this piece is the component of actually saving for retirement. As you begin to solidify your footing in self-employment, with a handle on taxes, emergency fund, and debts, you can turn your attention to putting money away for the future. 

There are several ways to go about saving for retirement when you don’t have access to a company 401(k) plan. There are pros and cons to each option, so I’d recommend consulting with a financial advisor (like me) about which route is the best for your situation. 

SEP IRA – Simplified Employee Pension IRA

If you have a good chunk of income from your self-employment, this may be a good option for you. The 2025 contribution limit for a SEP IRA is the lesser of $70,000 or 25% of your compensation. It also carries tax benefits in the current tax year, with a deduction against your adjusted gross income for your current year contributions.

Solo 401(k)

I specifically referenced a lack of a company-sponsored 401(k) earlier because there is still a 401(k) option when you’re self-employed. A solo 401(k) carries its own complexities for self-employed individuals, but it is still a 401(k) plan at its core. 

According to the IRS, “The one-participant 401(k) plan isn’t a new type of 401(k) plan. It’s a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.” 

Traditional IRA

The limit for Traditional IRA contributions is much lower than the SEP IRA option ($7,000 for 2025), but it still carries tax benefits for the current tax year. Your contributions to your Traditional IRA can be deducted on your tax return. 

Roth IRA

While the other options we covered may help you reduce your income (and therefore, your taxes) in the current tax year, a Roth IRA will benefit you when it comes time to withdraw the money in retirement. If you’re not as concerned about minimizing your current tax burden, this may be a good option for you to save money at retirement. The contribution limit is the same as a Traditional IRA, and you should note there are income limits for contributing to a Roth IRA. 

Wrapping Up

Transitioning to self-employment offers a unique set of opportunities and challenges, especially when it comes to planning for retirement. While the freedom to set your own schedule and earn based on your efforts is appealing, it’s vital to prioritize financial stability and make informed decisions about savings, debt management, and tax implications, so you can sustainably save for the future. 

If you have questions about self-employment and creating a comprehensive financial plan to solidify your financial footing, don’t hesitate to reach out to our team to schedule a discovery meeting.

About the Author

Clinton Miller, CFP®, is an investment advisor & financial planner with an educational background in mathematics.  He enjoys making tax planning relevant for clients so they can make confident money decisions. 

He and his wife Aubrey are based in Canton, OH & have two sons.  In his spare time, he enjoys fishing, chainsaw repair, & mucking around in the woods.