What IRA is best for self-employed?

If you are self-employed, you are solely responsible for setting up a retirement plan. Find out the best IRAs for self-employed workers.

3 min read

Being self-employed comes with a lot of freedom, but you are also under a lot of stress and financial pressure. However, this is not enough reason not to save for retirement. Unlike employed workers who open a 401(k) plan through their employer, you are solely responsible for choosing a retirement account, and deciding how much to contribute to the retirement account.

A SEP IRA is one of the best IRAs for self-employed workers. For 2022, you can contribute up to $61,000, up from $58,000 in 2021, and you must make an equal percentage contribution to each employee’s retirement account. If you own a large business with up to 100 employees, a SIMPLE IRA is a good option. Employees contribute to their retirement accounts, and the employer must make an employer’s match or contribute up to 2% of the employee’s salary.

Traditional IRA or Roth IRA

Anyone with earned income can open and contribute to an individual retirement account (IRA). An IRA provides greater flexibility for self-employed workers since retirement savers get full control over their investment options. You can contribute up to $6000 in 2022 and an extra $1000 if you are above age 50.

You can decide to open either a traditional IRA or Roth IRA. With a traditional IRA, you contribute pretax dollars, and you only pay taxes when you take a distribution from the account.

You can also opt for a Roth IRA, which requires retirement savers to pay taxes now so that future distributions in retirement will be tax-free. A Roth IRA may be a better option than a traditional IRA if your business is relatively young, and you expect it to grow at a fast pace in the future.


A SEP IRA is available to small businesses where the owner is the only employee, or with few employees other than the owner. For 2022, you can contribute $61,000 or up to 25% of compensation, with a limit of $305,000 in compensation, up from $58,000 in 2021, and $290,000 limit on compensation.

A SEP IRA requires the employer to contribute to the employees’ accounts. In this case, the business owner is considered one of the employees of the business. The business must make equal percentage retirement contributions to all eligible employees. This means that if you decide to contribute 10% of your salary to your SEP IRA account, you must contribute 10% to each eligible employee. However, there is no Roth version of a SEP IRA.


The SIMPLE IRA is ideal for large businesses with about 100 employees. It is similar to a traditional IRA since its contributions are tax-deferred, and has similar withdrawal requirements.

Unlike a SEP IRA, the contribution burden is not solely on the employer; employees can contribute to the account through salary deferrals. The employer must contribute to the employee's account by either matching contributions up to 3% of salary, or contributing up to 2% of the salary of all eligible employees.

Employees can defer up to $14,000 in 2022, up from $13,500 in 2021, and employees above age 50 are allowed to contribute an additional $3000 in catch-up contributions. If you contribute to an employer’s plan, the annual contributions cannot exceed $20,500 in 2022.

A SIMPLE IRA is simple to open, and you can open an account with an online broker. Due to the mandatory contributions that an employer must make to the employee’s account, it can be expensive for the employer to maintain if the business has a large number of eligible employees.

If you take an early distribution within the first two years since account opening, you will pay a 25% penalty on the amount withdrawn. However, if you take a distribution later but before you reach age 59 ½, you will pay a 10% early withdrawal penalty and the regular income taxes.

Backdoor IRA

If your annual income exceeds the IRS limit for Roth IRA, you cannot contribute to a Roth IRA. However, you can use the Backdoor Roth IRA to maneuver this limitation. This strategy involves opening a traditional nondeductible IRA and contributing to the account.

Typically, you can contribute up to $6,000 in 2022, or $7,000 if you are above 50. After some time, you can convert the IRA into a Roth IRA, since there are no income restrictions for Roth conversion.

Where to Open an IRA if you are Self Employed

If you are self-employed, you can compare the various IRAs that work best for your situation. Once you have picked an IRA, you must then decide where to open an account.

Typically, you can open an IRA with an online broker and file the paperwork needed. Usually, the broker will guide you through the process of opening an account and help you file the paperwork with the IRS. Once the retirement account is set up, you can start making contributions to your IRA.