Establish a Simplified Employee Pension plan (SEP).
Although a SEP plan was actually designed as a way for employers to contribute money to traditional IRAs that are set up for their employees, self-employed workers may also establish a SEP. There are, however, some stipulations to the amount of money you can add to your SEP-IRA each year. According to the IRS, contributions cannot exceed the lesser of 25 percent or $53,000 (for 2015 and 2016). Since these amounts can vary from year to year, it is important to review your SEP-IRAs contribution requirements each year to look for changes.
Create a solo 401(k).
A solo 401(k), which is sometimes referred to as an individual 401(k), works in a way that is similar to the traditional 401(k) plans often offered by large companies. Unlike a traditional 401(k) plan or other type of retirement plan, the solo 401(k) is strictly for sole proprietors who have no employees. Exceptions are made for spouses of sole proprietors, however, and they too may contribute if they earn income for the business.
CNN Money explains that the solo 401(k) is actually similar to an IRA in that it has both a traditional version and a Roth version. The traditional solo 401(k) allows you to contribute money on a pretax basis and is tax-deferred. This means that your money is not taxed until you withdraw it. The downside is that you may find in the future that you are paying a higher tax rate. The Roth solo 401(k) allows you to put in after-tax dollars and the growth is then tax-free. This can offer a huge benefit, since the money is not taxed when you later draw it out.
Interestingly, one great advantage to a solo 401(k) over other types of retirement plans for the self-employed is that it consists of two parts, allowing you to put away a lot larger amount for retirement with a smaller salary base. Since you are both employer and employee, you can contribute under the employee salary deferral part and the employer profit-sharing contribution part.
Open a good old-fashioned IRA.
Since an IRA only allows you to make small contributions each year, it won’t provide the sizable nest egg you may one day need. If you’re not quite ready to make those larger types of contributions to a SEP or solo 401(k) though, it is still a good place to start.