Richmond, VA Guide to Building a Retirement Plan When You Work for Yourself

Self-employed residents often have more control over their work and income, but they generally do not have an employer-sponsored retirement plan, automatic payroll deposits, or a company match. Retirement planning therefore requires deliberate decisions about saving, taxes, Social Security, health coverage, and the future of the business itself.

What makes retirement planning different for self-employed workers?

The main difference is that the business owner must fill several roles at once: worker, employer, benefits coordinator, and retirement plan administrator.

Income may also vary from month to month. A consultant, contractor, independent tradesperson, freelancer, or business owner might have a strong spring and summer followed by slower periods, especially when work depends on projects, weather, or household spending patterns.

A workable plan should account for:

• Irregular income and quarterly tax payments
• No automatic employer match
• Self-employment taxes for Social Security and Medicare
• Business cash-flow needs
• Health insurance before Medicare eligibility
• Potential income from selling, closing, or transferring the business
• Housing costs, property taxes, utilities, and maintenance during retirement

Retirement savings should be treated as a recurring business expense rather than something funded only when the year turns out well.

Which retirement accounts are available to self-employed individuals?

Several account types can work well, but each has different contribution rules, administrative requirements, and tax treatment.

SEP-IRA

A Simplified Employee Pension plan is often straightforward to establish and administer. Contributions are generally made by the business, and the contribution amount can be adjusted from year to year.

For 2026, contributions are generally limited to the lesser of 25% of eligible compensation or $72,000. The calculation for a sole proprietor is more involved than simply applying 25% to business revenue because it considers business expenses and self-employment tax.

A SEP-IRA may be useful when income is strong but uneven. However, business owners with eligible employees generally must make comparable contributions for those employees, which can affect the cost of the plan.

Solo 401(k)

A solo 401(k), also called an individual 401(k), can allow both employee-style and employer-style contributions. This may provide substantial savings potential for a business owner with no employees other than a spouse.

For 2026, the employee contribution limit for a traditional 401(k) is $24,500, before any applicable catch-up contribution. The overall annual additions limit is generally $72,000, excluding catch-up contributions. People ages 50 and older may generally contribute an additional $8,000, while a higher catch-up limit applies for certain individuals ages 60 through 63.

The calculations depend on the business structure and compensation method. A solo 401(k) may also require additional reporting once the account reaches certain asset levels.

SIMPLE IRA

A Savings Incentive Match Plan for Employees can be easier to operate than a traditional 401(k), but it has lower contribution limits and employer contribution requirements.

For 2026, the employee contribution limit is generally $17,000. Catch-up contributions may be available for older participants, with special higher limits for some people ages 60 through 63.

This type of plan may fit a small business with employees, but the required employer contribution should be included in the budget before adopting it.

Traditional and Roth IRAs

An IRA can supplement a larger self-employed retirement plan. Traditional IRA contributions may be deductible depending on income and participation in other retirement plans. Roth IRA contributions are made with after-tax dollars, but qualified withdrawals are generally tax-free.

Income limits apply to direct Roth IRA contributions. A Roth IRA also has no required minimum distributions during the original owner’s lifetime under current federal rules, which may provide additional flexibility later.

How much should a self-employed person save?

There is no single percentage that fits every business owner. A practical starting point is to estimate the annual retirement income gap:

1. Estimate future Social Security income.
2. Estimate housing, insurance, food, transportation, taxes, and other regular expenses.
3. Add irregular costs such as roof repairs, vehicle replacement, family support, or travel.
4. Subtract expected income from part-time work, rental property, pensions, or other sources.
5. Determine how much investment income or withdrawals may be needed to cover the difference.

A business owner with a paid-off home may have a different target from someone who expects to carry a mortgage into retirement. Richmond households should also account for property taxes, homeowners insurance, heating and cooling costs, and maintenance on older homes.

During high-income years, saving a fixed percentage of net business income can be effective. During slower years, maintaining a smaller contribution may be more realistic than abandoning the plan entirely.

How does self-employment income affect Social Security?

Net income from self-employment is used to calculate Social Security taxes and benefits. Business owners generally need to report their earnings accurately and pay the required taxes for those earnings to appear on their Social Security record.

In 2026, one Social Security credit is generally earned for each $1,890 in covered earnings, up to four credits per year. The amount needed for a credit can change over time.

A low reported income may reduce current taxes, but it can also reduce future Social Security benefits. Business owners should review their earnings record periodically for missing or incorrect information.

Social Security claiming age also matters. Benefits can begin as early as age 62, but starting before full retirement age generally results in a permanently reduced monthly benefit. Continuing to work while receiving benefits may also trigger the earnings test before full retirement age.

What tax issues should be considered?

Retirement contributions can affect both current taxes and future taxable income. Traditional accounts may reduce taxable income now, while withdrawals are generally taxable later. Roth contributions do not usually reduce current taxable income, but qualified withdrawals are generally tax-free.

Virginia generally does not tax Social Security benefits. Most distributions from traditional IRAs, 401(k) plans, and similar accounts are generally taxable at the state level, subject to applicable exceptions and deductions.

Tax planning should also consider:

• Estimated tax payments during the year
• The self-employment tax deduction
• Business structure and owner compensation
• Required minimum distributions
• Roth conversions
• Taxable investment accounts
• The timing of a business sale or liquidation

Rules and income limits change, so contribution amounts should be checked for the specific tax year rather than copied from an older plan.

How should a business owner prepare for leaving the business?

Retirement may not happen on a single date. Some owners gradually reduce hours, stop accepting new clients, train a successor, sell the company, or continue working part time.
The business itself should not be treated as the entire retirement plan unless there is a realistic path to transferring or selling it. A buyer may not pay for a business that depends entirely on the owner’s personal relationships, knowledge, or daily labor.
Useful preparation may include documenting procedures, separating personal and business finances, reviewing contracts, maintaining accurate financial records, and identifying which assets actually have resale value.
The transition plan should also address how clients, employees, equipment, leases, outstanding invoices, and business debts will be handled.

What should be reviewed each year?

An annual review can help keep the plan aligned with changing income and federal rules. Check:

• Retirement account contribution limits
• Business profit and estimated taxes
• Social Security earnings history
• Beneficiary designations
• Disability and life insurance needs
• Health insurance costs before Medicare
• Investment allocation and emergency savings
• Expected housing and property expenses
• Progress toward reducing dependence on the business

For self-employed individuals, retirement planning works best as an ongoing business process. The goal is not simply to open an account, but to build several dependable income sources that can continue after active work becomes optional.