Save More. Pay Less Tax.
If you’re self-employed, planning for retirement might feel overwhelming but it doesn’t have to be. The right plan can help you lower your tax bill, grow your savings, and build long-term financial security. Below is a simple guide to the most common retirement plan options for self-employed taxpayers. These are popular choices, but other plans may fit better depending on your goals and situation.
Plans for Self-Employed Individuals with No Employees
Solo 401(k)
- 2025 Contribution Limits: Up to $70,000 total; $77,500 if age 50+ (includes $7,500 catch-up)
- Tax Benefits: Employee deferrals reduce taxable income; employer contributions are deductible
- Key Considerations: Must file Form 5500 if plan assets exceed $250,000
SEP IRA
- 2025 Contribution Limits: Up to 20% of net self-employment income, capped at $70,000
- Tax Benefits: Contributions are tax-deductible
- Key Considerations: No employee deferrals; contributions can vary year by year
Traditional or Roth IRA
- 2025 Contribution Limits: Up to $7,000; $8,000 if age 50+
- Tax Benefits:
- Traditional IRA: May be tax-deductible depending on income and other coverage
- Roth IRA: No deduction, but qualified withdrawals are tax-free
- Key Considerations: Income limits apply for Roth contributions and Traditional IRA deductions, yet simple and flexible
Plans for Self-Employed Individuals with Employees
401(k) Plan (with Employees)
- 2025 Contribution Limits: $23,500 for employee salary deferrals, and $70,000 for the combined employee and employer contributions; $77,500 if age 50+ (includes $7,500 catch-up)
- Tax Benefits: Contributions reduce taxable income; earnings grow tax-deferred
- Key Considerations: Requires formal setup, annual filings, and may require nondiscrimination testing
SIMPLE IRA
- 2025 Contribution Limits: Employee deferral up to $16,500; $20,000 if age 50+
- Tax Benefits: Employee deferrals reduce taxable income; employer contributions are deductible
- Key Considerations: Mandatory employer contributions; lower limits than Solo 401(k) or SEP IRA
Defined Benefit Plan
- 2025 Contribution Limits: Based on age and income; often exceeds $100,000 annually
- Tax Benefits: Contributions are tax-deductible and grow tax-deferred
- Key Considerations: Requires actuarial calculations, consistent funding, and annual administration
Practical Takeaways
- Max contributions: Solo 401(k), 401(k) with employees, Defined Benefit Plan
- Simplicity: SEP IRA, Traditional/Roth IRA
- Have employees? SIMPLE IRA, 401(k), Defined Benefit Plan
- Combine plans: High-limit plan + IRA = extra savings potential
- Admin considerations: 401(k) & Defined Benefit = more paperwork; SEP IRA & IRAs = simple
Case Example
Self-employed consultant: $350,000 net earnings
- Chose: SEP IRA (20% of net earnings), contribution: $70,000
- Tax impact: Reduced taxable income to $280,000 → roughly $19,600 federal tax saved (assuming a 28% bracket)
- Outcome: Lower taxes today, retirement savings grow tax-deferred
FAQs
Q: How do I pick the right plan?
A: Consider your income, whether you have employees, and whether you prefer tax savings now or later.
Q: Can I use more than one plan?
A: Yes. Many self-employed individuals use a Solo 401(k), SEP IRA, or Defined Benefit Plan along with a Traditional or Roth IRA just to make sure to stay within annual IRS limits.
Q: What if I contribute too much?
A: Overcontributing can lead to taxes and penalties, but it’s fixable. You can withdraw the excess before your tax deadline or apply it to next year’s limit.
Q: I make too much to contribute to a Roth IRA. Do I have any options?
A: Yes! A Backdoor Roth IRA may be a smart workaround. It involves contributing to a Traditional IRA and then converting it to a Roth. It’s a great way for high earners to benefit from tax-free growth but watch for the pro-rata rule if you have other pre-tax IRA balances.
Let’s Build Your Retirement Strategy
Choosing the right plan can make a big difference for both your tax bill and your future savings. If you’re self-employed and want to take advantage of the 2026 contribution limits, we can review your income, business setup, and goals to design a smart, personalized retirement plan. It’s also not too late to consider 2025 contributions for certain plans.
Disclaimer
2025 contribution limits are based on official IRS guidance as of October 2024. 2026 contribution limits will be published on the IRS website when released. This content is for informational purposes only and does not constitute legal or tax advice. Please consult your advisor before implementing any strategy.
Diem Bui – CPA, EA, MBA, Tax Manager
References
https://www.irs.gov/retirement-plans/retirement-plans-for-self-employed-people
https://www.irs.gov/retirement-plans/retirement-plans-faqs-regarding-seps
https://www.irs.gov/retirement-plans/retirement-plans-for-small-entities-and-self-employed
