Types of Retirement Savings Plans

Learn the principal types of retirement savings plans:

Individually Managed Plans (IRAs)

Individually managed retirement savings plans are set up and managed by each individual taxpayer. More commonly known as Individual Retirement Accounts (IRAs). IRAs were first authorized by the Employee Retirement Income Security Act of 1974 (ERISA). Originally, IRAs were limited to workers without pension coverage, but the Economic Recovery Act of 1981 made all workers and spouses eligible to have IRAs.

An IRA is long-term retirement savings account or annuity that you establish directly with a financial institution, such as a bank, brokerage, insurance, or mutual fund company (the “fiduciary”).

The amounts that you contribute must be from wages earned as an employee (Form W-2), commissions, compensation received from self-employment (Form 1099-NEC and/or Form 1099-MISC), and/or taxable alimony. Income received from passive income sources such as interest, dividends and capital gains, pensions and retirement plan distributions, rental real estate, gifts and nontaxable alimony does not qualify as income sources that can be contributed into an IRA.

You can make contributions into an IRA at any time during the current year, and up through April 15th of the following year.

Tax Tip

The filing of an Extension does NOT extend the deadline for making contributions into an IRA for the current tax year beyond the April 15th deadline.

One provision of the SECURE Act 1.0 of 2019 removed the age limit to make contributions into an IRA - as long as you continue to work. Under prior law, the age at which one could make contributions into an IRA had been capped at age 70½.

There are two types of individually managed retirement savings plans:

Traditional IRAs
Roth IRAs

Traditional IRAs

A Traditional IRA is a tax-advantaged personal savings plan where the individual may be able to deduct the contributions that they make into a Traditional IRA on their Form 1040 tax return if they meet certain conditions.

Under Federal law, individuals may set aside personal savings into a Traditional IRA up to the limits set in the following table:

Traditional IRA Contribution Limits

Tax Year	Contribution Limits
	Under Age 50	Age 50 or Older
2026	7,500	8,600
2025	7,000	8,000
2024	7,000	8,000

You can make contributions to both Traditional IRAs and Roth IRAs, but the total amount contributed cannot exceed this annual limit.

All contributions made into a Traditional IRA will take advantage of The Power of Compounding over the years. Federal income taxes and any State income taxes (Massachusetts residents only) on the contributions you made, and all interest, dividends and capital gains realized on your Traditional IRA investments will be deferred until the years that you withdraw funds from your Traditional IRA.

Married Taxpayers, Filing "Married, Filing Jointly"

If neither the taxpayer nor their spouse is covered by a retirement plan at work, their full contributions into a Traditional IRA are deductible.

If one spouse is covered by a retirement plan at work whereas the other is not, they may be entitled to only a partial (reduced) deduction for their Traditional IRA contributions, or even no deduction at all, depending on their Modified Adjusted Gross Income (MAGI). The deduction begins to decrease (phase out) when their income rises above a certain amount and is eliminated altogether when it reaches the higher threshold.

Traditional IRA Contribution Deduction Limitations
"Married, Filing Jointly" Filers
Only One Spouse Covered by a Workplace Retirement Plan

Tax Year	Modified AGI		Deduction Limits
	Over	But Not Over	Under Age 50	Age 50 or Older

2026	252,000 +		No Deduction
	242,000	252,000	Partial Deduction
	0	242,000	7,500	8,600

2025	246,000 +		No Deduction
	236,000	246,000	Partial Deduction
	0	236,000	7,000	8,000

2024	240,000 +		No Deduction
	230,000	240,000	Partial Deduction
	0	230,000	7,000	8,000

If both the taxpayer and their spouse are covered by a retirement plan at work, they may be entitled to only a partial (reduced) deduction for their Traditional IRA contributions, or even no deduction at all, depending on their MAGI. The deduction begins to decrease (phase out) when their income rises above a certain amount and is eliminated altogether when it reaches the higher threshold.

Traditional IRA Contribution Deduction Limitations
"Married, Filing Jointly" Filers
Both Spouses Covered by a Workplace Retirement Plan

Tax Year	Modified AGI		Deduction Limits
	Over	But Not Over	Under Age 50	Age 50 or Older

2026	149,000 +		No Deduction
	129,000	149,000	Partial Deduction
	0	129,000	7,500	8,600

2025	146,000 +		No Deduction
	126,000	146,000	Partial Deduction
	0	126,000	7,000	8,000

2024	143,000 +		No Deduction
	123,000	143,000	Partial Deduction
	0	123,000	7,000	8,000

Single Taxpayers

If a taxpayer filing as “Single” is not covered by a retirement plan at work, their full contribution to a Traditional IRA is deductible.

If a taxpayer filing as “Single” is covered by a retirement plan at work, they may be entitled to only a partial (reduced) deduction for their Traditional IRA contribution, or even no deduction at all, depending on their Modified Adjusted Gross Income (MAGI). Your deduction begins to decrease (phase out) when your income rises above a certain amount and is eliminated altogether when it reaches the higher threshold.

Traditional IRA Contribution Deduction Limitations
“Single” Filer - Covered by a Workplace Retirement Plan

Tax Year	Modified AGI		Deduction Limits
	Over	But Not Over	Under Age 50	Age 50 or Older

2026	91,000 +		No Deduction
	81,000	91,000	Partial Deduction
	0	81,000	7,500	8,600

2025	89,000 +		No Deduction
	79,000	89,000	Partial Deduction
	0	79,000	7,000	8,000

2024	87,000 +		No Deduction
	77,000	87,000	Partial Deduction
	0	77,000	7,000	8,000

Note

There are separate “Traditional IRA Contribution Deduction Limitation” tables for taxpayers who file as “Married, Filing Separately” (MFS) and as “Head of Household” (HOH). However, because these tax filing situations occur somewhat infrequently, I have opted not to include them here for brevity. You may view these tables by visiting www.irs.gov.

Non-Deductible Contributions into a Traditional IRA

You could make non-deductible contributions into a Traditional IRA. Why would you want to do this? To be able to make what are known as “Back-Door Roth IRA” contributions, as discussed below.

You must report all non-deductible contributions into a Traditional IRA on Form 8606 that is attached to your Form 1040 income tax return each year. Otherwise, the IRS will treat these non-deductible contributions as ordinary tax-deferred contributions and levy Federal income taxes on the non-deductible contributions you made, and all interest, dividends and capital gains realized on your non-deductible contributions in the years that you withdraw funds from your Traditional IRA.

Roth IRAs

A Roth IRA is a tax-advantaged personal savings plan where contributions are not deductible but qualified distributions may be tax free.

The Roth IRA, named after the late Delaware Sen. William Roth, became a savings option in 1998, followed by the Roth 401(k) in 2006. Creating a tax-free stream of income is a powerful retirement tool. These accounts offer big benefits, but the rules for Roth IRAs can be complex.

There are significant tax benefits to a Roth IRA. Roth IRAs can provide a stream of tax-free income to draw upon during your retirement. Distributions received from Roth IRAs are not counted in the calculation for taxing Social Security benefits, for example, or in the calculation of income tax levied on investment income.

Under Federal law, individuals may set aside personal savings into a Roth IRA up to the limits set in the following table:

Roth IRA Contribution Limits

Tax Year	Contribution Limits
	Under Age 50	Age 50 or Older
2026	7,500	8,600
2025	7,000	8,000
2024	7,000	8,000

You can make contributions to both Roth IRAs and Traditional IRAs, but the total amount contributed cannot exceed this annual limit.

All contributions made into a Roth IRA will take advantage of The Power of Compounding over the years. Normally, no Federal or State income taxes will be levied on the contributions you made, and all interest, dividends and capital gains realized on your Roth IRA investments in the years that you withdraw funds from your Roth IRA. This is discussed in more detail below.

Regardless of whether you are covered by a retirement plan at work, you may be able to make a full or reduced contribution to a Roth IRA, or even no contribution at all, based on your Modified Adjusted Gross Income (MAGI). The amount of their contribution begins to decrease (phase out) when their income rises above a certain amount and is eliminated altogether when it reaches the higher threshold.

Roth IRA Contribution Income Limitations
"Married, Filing Jointly" Filers

Tax Year	Modified AGI		Deduction Limits
	Over	But Not Over	Under Age 50	Age 50 or Older

2026	252,000 +		No Contribution
	242,000	252,000	Reduced Contribution
	0	242,000	7,500	8,600

2025	246,000 +		No Contribution
	236,000	246,000	Reduced Contribution
	0	236,000	7,000	8,000

2024	240,000 +		No Contribution
	230,000	240,000	Reduced Contribution
	0	230,000	7,000	8,000

Roth IRA Contribution Income Limitations
"Single" Filers

Tax Year	Modified AGI		Deduction Limits
	Over	But Not Over	Under Age 50	Age 50 or Older

2026	168,000 +		No Contribution
	153,000	168,000	Reduced Contribution
	0	153,000	7,500	8,600

2025	165,000 +		No Contribution
	150,000	165,000	Reduced Contribution
	0	150,000	7,000	8,000

2024	161,000 +		No Contribution
	146,000	161,000	Reduced Contribution
	0	146,000	7,000	8,000

Note!

There are separate “Roth IRA Contribution Income Limitation” tables for taxpayers who file as “Married, Filing Separately” (MFS) and as “Head of Household” (HOH). However, because these tax filing situations occur somewhat infrequently, I have opted not to include them here for brevity. You may view these tables by visiting www.irs.gov.
.

Back-Door Roth IRA

A “Back-Door Roth IRA” is a workaround process to make a contribution into a Roth IRA when one’s Modified AGI exceeds the allowed income limits for a standard Roth IRA contribution.

To start this process, you need to make a Non-Deductible Contribution into a Traditional IRA, as discussed above, and then convert this contribution into a Roth IRA. To make such a contribution, inform your fiduciary that you wish to make “a nondeductible contribution into a Traditional IRA using after-tax dollars, and then convert this contribution into a Roth IRA.” You should make the contribution and the conversion on the same day, if possible.

The challenge with Back-Door Roth IRAs, from an income tax perspective, lies in whether you had made any contributions into a Traditional IRA, or had rolled retirement plan funds over into a Traditional Rollover IRA. If this is the case, then a proportion of the funds in the Traditional IRA will be treated as taxable income in the year that you made the Back-Door Roth IRA contribution, as calculated on Form 8606. Most often, this scenario arises when the taxpayer rolled retirement plan funds over from a former employer’s 401(k), 403(b) or 457 plan into a Traditional Rollover IRA.

Tax Tip

Should you have any active Traditional IRA accounts, you should first roll all the assets in such Traditional IRA accounts into a Solo 401(k) Plan account BEFORE you make a Back-Door Roth IRA contribution. This will segregate these retirement plan assets into an arms-length self-employment retirement plan that will not be subject to the proportional taxation, as is discussed above.

Differences Between Traditional IRAs and Roth IRAs

The fundamental differences between Traditional IRAs and Roth IRAs are the (a) timing of payment of your income tax liabilities, and (b) character of the distributions (withdrawals) that you will receive. With a Traditional IRA, you receive a tax break for the funds that you contribute into your Traditional IRA each year and later pay income taxes on all distributions. With a Roth IRA, you contribute after-tax dollars into your Roth IRA and receive tax-free withdrawals in retirement.

By accepting the up-front tax breaks for Traditional IRA accounts, you accept the IRS as your partner in retirement. For example, if you're in the 24% tax bracket in retirement, 24% of all your Traditional IRA withdrawals - including your contributions and their earnings - will effectively belong to the IRS. With a Roth IRA, 100% of all withdrawals in retirement are yours.

The Roth IRA strategy of paying income taxes sooner rather than later will pay off particularly well if you're in a higher tax bracket when you withdraw the funds in retirement than when you passed up the tax break offered by contributing into a Traditional IRA. If you're in a lower tax bracket, though, the Roth IRA advantage will be diminished.

Employer-Sponsored Plans (401(k), 403(b) and 457 Plans, and Pensions)

The IRS defines two principal types of employer-sponsored retirement savings plans:

Defined Contribution Plans
Defined Benefit Plans

Defined Contribution Plans

Defined Contribution Plan is a retirement plan in which the employee and/or the employer contribute to the employee’s individual account under the plan. Examples of defined contribution plans include 401(k) plans, 403(b) plans, employee stock ownership plans and profit-sharing plans.

The amount in the account at distribution includes the contributions and investment gains or losses, minus any investment and administrative fees. Generally, the contributions and earnings are not taxed until distribution. The value of the account will change based on contributions and the value and performance of the investments.

401(k) Plans

401(k) Plan is a defined contribution plan where an employee can make contributions from his or her paycheck either before or after-tax, depending on the options offered in the plan. The contributions go into a 401(k) account, with the employee often choosing the investments based on options provided under the plan. In some plans, the employer also makes contributions such as matching the employee’s contributions up to a certain percentage. SIMPLE and safe harbor 401(k) plans have mandatory employer contributions.

401(k) plans were created as a provision of the Revenue Act of 1978. In 1981, the IRS issued new rules that allowed employees to fund their 401(k) through payroll deductions. This kickstarted the 401(k)’s popularity. Within a couple of years, nearly one-half of all large companies were offering 401(k)s to their employees.

Safe Harbor 401(k) Plan is similar to a traditional 401(k) plan, but the employer is required to make contributions for each employee. The safe harbor 401(k) eases administrative burdens on employers by eliminating some of the rules ordinarily applied to traditional 401(k) plans.

Employee Stock Ownership Plan (ESOP) is a type of defined contribution plan that is invested primarily in employer stock.

Profit-Sharing Plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution. A profit-sharing plan may include a 401(k) feature.

How 401(k) Plans Work - If your employer offers a 401(k) and you meet the plan’s eligibility requirements, you can enroll in the plan and begin making contributions via payroll deductions.

401(k)s come in two distinct flavors: Traditional and Roth. Although at their heart they aim to achieve the same purpose — to encourage Americans to save more for retirement by offering tax incentives — they do this in drastically different ways. Here are the main ways they differ.

Traditional 401(k) - Your contributions are made before Federal and State income taxes were withheld from your income. Over the years your retirement money compounds and grows tax-deferred. This means the contributions you make help lower your taxable income now, and you won’t pay any Federal or State income taxes on either your contributions or investment earnings until you begin making withdrawals in retirement. At that point, the money will be taxed as ordinary income.

Roth 401(k) - Your contributions are made after Federal and State income taxes were withheld from your income. However, your retirement money compounds and grows tax-free for life. Because you already paid the income taxes up front, when you withdraw money during retirement, you won’t have to pay any additional income taxes on the amount invested nor on the investment earnings. The Power of Compounding a substantial sum of money tax-free over one’s lifetime is a very attractive retirement savings feature – one that should be pursued diligently!

The Roth 401(k) is a retirement savings plan which represents a unique combination of features of the Roth IRA and a traditional 401(k) plan. Roth 401(k)s were created as a provision of the Economic Growth and Tax Relief Reconciliation Act (EGTRRA) of 2001. In 2006, U.S. employers were allowed to amend their 401(k) plan documents to allow employees to elect Roth IRA type tax treatment for a portion or all their retirement plan contributions.

Which one you choose will depend on several factors, including whether your company offers both (Roth 401(k)s are not as commonly offered as traditional 401(k)s) and whether you want a tax break now or later.

Matching Contribution Benefit

If your employer offers a matching contribution benefit, it’s a great idea to try to contribute at least enough to meet 100% of your employer’s match, as this is “free money” for you. A company might, for instance, match half of the contributions you make on the first 6% of your salary, or match 100% of what you contribute up to a certain dollar amount or percentage of your salary. In some rare cases, your employer might even match what you put in dollar for dollar.

Net Unrealized Appreciation (NUA)

Some employers may elect to fund their 401(k) plan matching contributions with shares of company stock rather than cash. Oftentimes, the company stock will have appreciated over the years. Net Unrealized Appreciation (NUA) is the difference in value between the cost basis of company stock and its market value at the time it is distributed in kind from the plan as part of a lump-sum distribution.

There are special tax advantages applied to any NUA on the company stock (referred to as the NUA strategy) that may help the taxpayer reduce taxes and avoid early withdrawal penalties on those assets. When utilizing the NUA strategy, the recipient must take a lump-sum distribution of all the assets in their employer-sponsored retirement plan account. The employer stock is distributed in kind and is usually transferred into a new, separate brokerage account. The remainder of the 401(k) Plan assets may either be (a) taken as a distribution that is taxable as ordinary income in the year received or (b) rolled over into a pre-tax Traditional IRA.

Usually, the pretax portion of what the recipient “paid” for the stock (i.e., the cost basis of the shares that were deposited into the 401(k) Plan account over the years) is taxable as ordinary income in the year it is distributed in kind to them. This portion may also be subject to a 10% early withdrawal penalty if the recipient is under the age of 59½.

Under the NUA rules, the recipient can elect to defer income taxes on the NUA until the time they liquidate the stock. Regardless of how soon they sell the stock after they receive it in kind, the NUA should be taxable at the more favorable long-term capital gains rate. NUA and any additional appreciation realized after the distribution in kind should not be subject to the 10% early withdrawal penalty, regardless of the recipient's age. The additional appreciation, however, should be taxable as short-term or long-term gains, depending on how long the recipient held the stock after it was distributed in kind from the 401(k) Plan.

Who is eligible to take advantage of the NUA Strategy? Taxpayers who:

Are eligible to take a lump-sum distribution from their plan—usually due to separation from employment, disability, or attaining 59½ years of age.
Receive the distribution of the company stock directly from their workplace plan. The NUA strategy cannot be used if the recipient rolls the company stock over into a Traditional IRA and then liquidates it.
Are able to pay income tax on the cost basis of the stock distributed in kind in the year in which it is taken.

Who may benefit from utilizing the NUA Strategy? Taxpayers who:

Have separated from the service of an employer (or are otherwise eligible to take a lump-sum distribution of their account).
Own highly appreciated employer stock in an employer-sponsored retirement plan.
Expect to be in a high tax bracket when they sell the company stock for income. The NUA strategy may help recipients reduce their taxes on the income realized from the sale of employer stock.
The NUA strategy may reduce the recipient’s future required minimum distributions (RMDs), since the employer stock is held outside an IRA.

403(b) Tax-Sheltered Annuity (TSA) Plan

403(b) Tax-Sheltered Annuity (TSA) Plan is a retirement plan offered by public schools and certain tax-exempt organizations. An individual’s 403(b) annuity can be obtained only under an employer’s TSA plan. Generally, these annuities are funded by elective deferrals made under salary reduction agreements and nonelective employer contributions.

403(b) plans had their origin in 1958, when Congress approved a tax-deferred savings device for employees of certain 501(c)(3) organizations by adding Section 403(b) to the Internal Revenue Code. In 1961, Congress extended IRS 403(b) to employees of educational institutions including colleges and public universities, with investments limited to annuities. Mutual funds held in custodial accounts were added in 1974. The program was intended to be a relatively simple way for employees to supplement retirement savings by using their own voluntary pre-tax dollars. Supplementing retirement savings has become increasingly important with widespread reductions in benefits being made to the state retirement system plans for those employees.

The same change in law (see “Roth 401(k)”, above) allowed Roth IRA type contributions to 403(b) retirement plans.

401(k) and 403(b) Plan Contribution Limits

Tax Year	Contribution Limits
	Under Age 50	Age 50 or Older
2026	24,500	32,500
2025	23,500	31,000
2024	23,000	30,500

Under a change made in the SECURE 2.0 Act of 2022, a higher catch-up contribution limit applies for employees aged 60, 61, 62, and 63 who participate in these plans. For 2026, the catch-up contribution limit is $11,250. For 2025, the catch-up contribution limit is $11,250, up from $7,500 in 2024. This means that these particular employees could contribute up to $35,750 into their 401(k), 403(b) or 457 Employer-Sponsored Plans during 2026, rather than the $32,500 shown in the above table.

Defined Benefit Plan

The Defined Benefit Plan, more commonly known as a traditional Pension Plan, promises the participant a specified monthly benefit at retirement. Often, the benefit is based on factors such as the participant’s salary, age and the number of years he or she worked for the employer. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service.

Pension plans were offered by most employers well into the 1990s. However, as the popularity of 401(k) and 403(b) plans continued to grow, and employers wrestled with the ever-increasing costs of funding and managing their pension plans, most private-sector pension plans were phased out or converted into 401(k) or 403(b) plans. Today, it is rare to find a private-sector employer who offers a pension plan benefit. It seems that only Federal, state and municipal government agencies still offer pension plans.

You can make contributions into an Employer-Sponsored Plans (401(k), 403(b) and 457 Plans, and Pensions) at any time during the current year. However, you cannot make contributions for the current year into any of these plans during the following year.

Self-Employed Plans

One of the principal financial advantages of being self-employed is that you can contribute a significant amount of money towards your retirement savings. Much more than you ever could by working as a conventional W-2 employee.

The challenge, of course, is in managing your business operations profitably to generate enough cash to be able to make such contributions into your retirement plans.

There are several self-employed retirement savings plans that you can choose:”

SEP-IRA (Simplified Employee Pension) Plan

A SEP-IRA is a retirement plan for small employers (including self-employed individuals) where the employer makes contributions into retirement accounts for themselves and their employees. Contributions are made by the business (employer contribution), up to 25% of compensation (for employees) or a somewhat lower effective percentage for self‐employed individuals.

For a sole proprietor or single-member LLC treated as self‐employed, the business owner acts as the employer and the employee. Contributions are limited to 25% of net self-employment business income as calculated on Schedule C of your Form 1040 income tax return.

A SEP-IRA Plan is easy to set up and operate, with minimal filing requirements and low administrative costs. SEP Plans offer flexibility for making annual contributions, an important feature if business cash flows are an issue.

All SEP-IRA contributions must be made into a Traditional IRA. All SEP-IRA contributions are immediately vested 100% ownership for everyone.

Contributions made into a SEP-IRA cannot exceed the lesser of 25% of each eligible employee’s compensation, or:

SEP-IRA Plan Contribution Limits

Tax Year	Contribution Limit
.	.
2026	$70,000
2025	$69,000
2024	$66,000

There are several drawbacks to a SEP-IRA:

There is no after-tax “Roth” SEP-IRA option available.
There are no over-age-50 catch-up contribution provisions.
If you have employees, you must contribute the same percentage of compensation for eligible employees as you do for yourself — this can make it expensive or unfair if you add employees.
There is no “elective deferral” component (i.e., you can’t contribute as “employee salary deferral” separate from the employer contribution) — only the employer side.
Participant loans are not permitted. The owner cannot borrow from the account.
The assets in a SEP-IRA account may not be pledged as collateral.

Contributions into a SEP-IRA made on behalf of self-employed individuals, business owner/partners and their spouses are not deducted as expenses from the business’s books. Instead, these contributions are reclassified and reported on Schedule 1, Part II, line 16 of your Form 1040 income tax return. The subtotal calculated on line 26 is then propagated forward to Form 1040, line 10 where it is applied to reduce the calculation of your Adjusted Gross Income (AGI) on line 11.

Any amounts paid out of the business as contributions into a SEP-IRA on behalf of self-employed individuals, business owner/partners and their spouses should be recorded as “Owner’s Draws”, or if the business is an S-Corp., as “Shareholder Distributions”.

Solo 401(k) Plan

A Solo 401(k) Plan is designed for business owners (sole proprietors, single-member LLCs, partnerships) who have no full-time employees other than themselves (or their spouses). They act both as the “employee” (salary deferral) and as the “employer” (profit-sharing contribution) under the 401(k) rules, hence potentially large contributions can be set aside into Solo 401(k) Plan accounts.

Solo 401(k) Plans offer a very high contribution potential. Participants get to set aside the elective deferral (as employee) plus employer profit-sharing component. Solo 401(k) Plans are quite flexible in that you get to decide each year how much to contribute (employee + employer) depending on business income and cash flows. Participants may also be able to borrow from Solo 401(k) Plan assets if the Plan document allows for such loans, and they often offer more flexible distribution options.

An after-tax “Roth” 401(k) Plan option is available.

You do not need to run a payroll to make Solo 401(k) Plan contributions.

Total elective deferrals to a participant’s Solo 401(k) Plan account cannot exceed the following amounts:

Solo 401 (k) Plan Contribution Limits

Tax Year	Elective Deferral Under Age 50	Contribution Limits Age 50 or Older
.	.	.
2026	24,500	32,500
2025	23,500	31,000
2024	23,000	30,500

For taxpayers aged 60-63, Solo 401(k) Plans allow for a “Super” catch-up contribution of $11,250 per year, compared with $8,000 and $7,500 for 2026 and 2025, respectively.

There are several drawbacks to a Solo 401(k) Plan:

There are more administrative requirements than a SEP-IRA. You must create and adapt a Solo 401(k) Plan document and adhere to the reporting requirements described below.
If you later hire employees, the plan may become subject to more complex rules.
Contribution calculations for self-employed business owners are somewhat more complex (net self-employment income after deducting your own contribution and adjusting for your self-employment tax liability).

Reporting Requirements

If the fair market value (FMV) of the combined assets in your Solo 401(k) Plan grows to over $250,000 in any year, the ERISA of 1974 requires that you e-file a Form 5500 Annual Return/Report of Employee Benefit Plan with the IRS by July 15th of the following year.

If your self-employed retirement plans are “one participant” plans (i.e., covering only the owner/partners and their spouses) not subject to ERISA's reporting requirements, you may opt to e-file the simpler Form 5500-EZ instead.

SIMPLE IRA Plan

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is available to self-employed individuals and small businesses (typically less than 100 employees). The business allows employee salary deferrals into the plan, and the employer must either match deferrals up to 3% of compensation or contribute 2% non-electively. For a self-employed owner without employees, you effectively make both employer and employee contributions.

SIMPLE IRAs are good for small businesses and freelance operators with minimal administrative burden (hence the name “SIMPLE IRA”). They are lower cost and simpler to set up and maintain that a full 401(k) Plan.

Total contributions into a participant’s SIMPLE IRA cannot exceed the following amounts:

SIMPLE IRA Contribution Limits

Tax Year	Elective Deferral Under Age 50	Contribution Limits Age 50 or Older
.	.	.
2026	17,000	21,000
2025	16,500	20,000
2024	16,000	19,500

For taxpayers aged 60-63, SIMPLE IRAs allow for a “Super” catch-up contribution of $5,250 per year, compared with $4,000 and $3,500 for 2026 and 2025, respectively.

There are several drawbacks to a SIMPLE IRA:

Annual contributions limits are lower than those for a SEP-IRA or Solo 401(k) Plan.
Employer contribution is mandatory each year (cannot be skipped if a SIMPLE IRA plan is in place) even if business has low profit.
If you have employees, you must contribute the same percentage of compensation for eligible employees as you do for yourself.

Profit-Sharing Plan

A Profit-Sharing Plan is a defined contribution plan under which the plan may provide, or the employer may determine, annually, how much will be contributed to the plan (out of profits from the business or otherwise). The plan contains a formula for allocating to each participant a portion of each annual contribution.

A profit-sharing plan may include a 401(k) Plan feature, as described above.

Money Purchase Pension Plan

A Money-Purchase Plan is a qualified defined-contribution plan where the employer must contribute a fixed percentage of compensation each year (for participants) as specified in the plan. Self-employed business owners may adopt such a plan for themselves.

A Money-Purchase Plan promises the participant a specified monthly benefit at retirement. Often, the benefit is based on factors such as the participant’s salary, age and the number of years he or she worked for the employer. The plan may state this promised benefit as an exact dollar amount, such as $100 per month at retirement. Or, more commonly, it may calculate a benefit through a plan formula that considers such factors as salary and service.

Money-Purchase Plans can offer potentially high contribution limits (similar to that of other defined-contribution plans) and a predictable contribution (i.e., a fixed percentage), which is good if the business is stable and profitable.

There are several drawbacks to a Money-Purchase Plan:

Employer contribution is mandatory each year. Even if business dips, you must still make contributions according to the formula.
Administrative complexity and costs are higher compared with SEP-IRAs and SIMPLE IRAs.

Tax Tip

You may make contributions into more than one self-employed retirement savings plan as long as the sum of all contributions made, including any employer matching contributions, does not exceed these annual limits as set forth by the IRS:

For example, here at TwardyCPA, I have been making contributions into a Solo 401(k) Plan and a separate Profit-Sharing Plan for many years. Beginning in 2026, I plan to make contributions into a Roth Solo 401(k) Plan and discontinue making contributions into my Solo 401(k) Plan.

Self-Employee Retirement Plans Annual Total Contribution Limits

Tax Year	Contribution Limits
	Under Age 50	Age 50 or Older
.	.	.
2026	72,000	80,000
2025	70,000	77,000
2024	69,000	76,500

Tax Tip

If you have employees, you must contribute the same percentage of compensation for all eligible employees as you do for yourself. IRS regulations prohibit you from implementing one (presumably, more lucrative) plan for yourself, then a different (presumably, less lucrative) plan for your employees.

Tax Tip

Make sure that you establish your self-employed retirement plan(s), and that all required paperwork is signed and in place with the bank, brokerage, insurance company, mutual fund fiduciary or other qualified financial institution that you have selected as the fiduciary to be the custodian of your self-employed plan(s) by December 31st.

You do not necessarily need to fund your current year contributions by December 31st, though. If your business is a sole proprietorship, a d/b/a or a Single Member LLC, you have up to April 15th of the following year to fund your current year retirement plan contributions. If your business is a Partnership or S-Corp., you have up to March 15th of the following year to fund your current year retirement plan contributions.

Tax Tip

If you File an Extension, the deadlines for making contributions into any of the above Self-Employed Plans for the current tax year will extend as well. If your business is a sole proprietorship, a d/b/a or a Single Member LLC, you have up to October 15th of the following year to fund your current year retirement plan contributions. If your business is a Partnership or S-Corp., you have up to September 15th of the following year to fund your current year retirement plan contributions.

If you still have funds remaining after you’ve made your self-employed retirement plan contributions, you may also make contributions into Individually Managed Plans (IRAs) for yourself. Traditional or Roth IRAs are individual retirement accounts that any individual with earned income (and satisfying other eligibility rules) may open. A self-employed person can make contributions for themselves (regardless of whether they also make contributions into a self-employed retirement plan). Contributions into a Traditional IRA may provide a possible tax deduction now (if eligible), and tax‐deferred growth. Contributions into a Roth IRA do not provide any current-year tax deductions; however, funds contributed will compound tax-free for life and allow qualified withdrawals tax-free.

Individually Managed Plans (IRAs) are very simple to set up and maintain and have low or no administrative costs. However, contribution limits are relatively low when compared with the self-employed retirement plans discussed above.

Please not that, unlike with self-employed retirement plans, the filing of an Extension does NOT extend the April 15th deadline for making contributions into Individually Managed Plans (IRAs).

Inherited Plans

Inherited retirement savings plans (“Inherited Plans”) are retirement plan funds that one received from the settlement of the estate of a person who had passed away – usually a parent or other relative, but sometimes a friend. Virtually all Inherited Plans are transferred to the beneficiary via a Direct rollover.

Inherited Plans are distributed only in the form of Traditional IRAs or Roth IRAs, depending upon the original character of the Plans when they were established by the deceased owner.

Employer-Sponsored plans such as Defined Benefit Plans (i.e., 401(k) plans, 403(b) plans, etc.) or Defined Benefit Plans (i.e., pension plans) are not eligible to be directly distributed to the recipients as the recipients were not the participants in such Plans. Instead, the Executor of the estate instructs each Plan’s fiduciary to convert that Plan’s assets into a Traditional IRA or Roth IRA first, depending upon the original character of each Plan when they were established, and then distribute the assets of each converted Plan to the beneficiaries according to the terms of the deceased owner’s will.

Distribution Requirements

Prior to 2020, Inherited Plan recipients had to start taking withdrawals from their Inherited Plans in the year immediately after the decedent’s death. The amount of the withdrawals, known as Required Minimum Distributions (RMDs) were determined by size of the Inherited Plan’s assets and by the IRS’ actuarial life expectancy tables that extend all the way out to age 115.

A nonspousal beneficiary of an IRA could “stretch” the receipt of these RMDs over his or her remaining actuarial life expectancy. This estate planning strategy allowed one to extend IRA distributions over future generations while the IRA continued to grow tax-deferred. Under this scenario, the younger the beneficiary, the better, as the RMD would be smaller, and the account could grow tax-deferred for a longer period of time. Younger beneficiaries have longer actuarial life expectancies, resulting in smaller RMDs taken in the beginning, growing larger over time. The “stretch IRA” strategy minimized the amount that must be withdrawn from the IRA each year and avoided a large, taxable, lump-sum distribution to the beneficiary.

SECURE Act of 2019

Under the "Setting Every Community Up for Retirement Enhancement Act of 2019,” also known as the “SECURE Act”, individuals who inherit an IRA after December 31, 2019 are required to withdraw all IRA plan assets within 10 years of the original account holder’s death. There are no RMDs during the 10-year period, as long as the entire IRA balance is withdrawn within 10 years of the date of death. §401 of the SECURE Act essentially eliminated “stretch” IRAs that could be stretched over the life of the beneficiary and grow tax-deferred for an extended period. §401 of the SECURE Act does not apply to account holders who died prior to December 31, 2019, and in this scenario, a beneficiary may still “stretch” distributions over his or her own lifetime. It is important to review client estate plans as the 10-year payout rule will come as a surprise to many and could undermine the original intent of the estate plan.

§401(a)(2) of the SECURE Act does allow for a few exceptions to the 10-year payout rule. Spouses, account holder’s children who have not reached the age of majority, beneficiaries less than 10 years younger than the account holder, and chronically ill or disabled beneficiaries are NOT subject to the 10-year distribution rule and are considered “eligible designated beneficiaries.” These individuals are eligible to withdraw inherited IRAs over their life expectancy as was customary prior to 2020, bypassing the 10-year rule. Designated beneficiaries include any person (i.e., not an entity or institution) subject to the 10-year rule.

Tax Tip

If the Inherited Plan is in the form of a Traditional IRA, you should consider taking 10 equal distributions annually over the required 10-year period to avoid a large, taxable, lump-sum distribution to the beneficiary at the end of the 10-year period.

However, if you don’t need these funds to supplement your operating budget, consider a Roth Conversion. Yes, you will still have to pay the income tax liabilities incurred because you received these Inherited Traditional IRA distributions. However, now these funds can capitalize on The Power of Compounding and grow tax-free for the rest of your lifetime.

Tax Tip

If the Inherited Plan is in the form of a Roth IRA, you should consider deferring the entire Inherited Plan distribution until the very end of 10-year period in order to capitalize on The Power of Compounding and allowed these funds to grow tax-free during the 10-year period.

Retirement Savings Tip

Your retirement savings are not necessarily limited to any of the above individually managed, employer-sponsored or self-employed retirement savings plans. Remember, you can always invest funds in taxable bank savings accounts, mutual funds or brokerage accounts no matter your age—whether you have earned income or not. While taxable accounts don't offer the same tax benefits as the retirement savings plan accounts described above, withdrawals of assets invested for more than a year are eligible for long-term capital gains rates—which can be lower than ordinary income tax rates. There are also no RMDs with a taxable account.

I cannot say this often enough. Save! Save! And Save Some More!

Retirement Savings Tip

If you’re already retired, consider taking on some part-time employment or a self-employment endeavor. Perhaps working one day a week at the local library or garden center. Or some seasonal work around Lake Sunapee or Mount Sunapee. Nothing significant, but enough for you to earn $7,500 - $10,000 or so each year. This would allow you to make the maximum contribution into your Roth IRA each year, where these funds would continue to grow and compound tax-free for the rest of your life.

Types of Retirement Savings Plans

Individually Managed Plans (IRAs)

Tax Tip

Traditional IRAs

Note

Roth IRAs

Note!

Tax Tip

Differences Between Traditional IRAs and Roth IRAs

Employer-Sponsored Plans (401(k), 403(b) and 457 Plans, and Pensions)

Matching Contribution Benefit

Tax Year

Contribution Limits

Self-Employed Plans

SEP-IRA (Simplified Employee Pension) Plan

Solo 401(k) Plan

SIMPLE IRA Plan

Profit-Sharing Plan

Money Purchase Pension Plan

Tax Tip

Tax Tip

Tax Tip

Tax Tip

Inherited Plans

Distribution Requirements

SECURE Act of 2019

Tax Tip

Tax Tip

Retirement Savings Tip

Retirement Savings Tip

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Barbara Hughey, Lexington, MA

K.D. Joslin

B.J., Lexington, MA

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