Retirement Plans for Self-Employed Business Owners: SEP-IRA, SIMPLE IRA, and Solo 401(k)

Retirement contributions reduce your taxable income dollar-for-dollar. For self-employed business owners, this is one of the most powerful tax strategies available — and one of the most underused. Here's a breakdown of the three main options.

Contribution limit (2024): Up to 25% of net self-employment income, maximum $69,000.

Best for: Self-employed individuals and small business owners who want simplicity and high contribution limits.

Key features:

• Easy to set up (can be done by tax filing deadline, including extensions)
• No annual filing requirements
• Employer contributions only (you can't make employee contributions)
• If you have employees, you must contribute the same percentage for them as you do for yourself

Contribution limit (2024): $16,000 employee contribution + employer match (up to 3% of compensation or 2% non-elective).

Best for: Small businesses with employees who want a straightforward plan.

Key features:

• Both employer and employee contributions allowed
• Lower contribution limits than SEP-IRA or Solo 401(k)
• Must be established by October 1 of the year you want to use it

Contribution limit (2024): Up to $69,000 ($76,500 if age 50+), combining:

• Employee contribution: up to $23,000 ($30,500 if 50+)
• Employer contribution: up to 25% of compensation

Best for: Self-employed individuals with no employees (other than a spouse) who want maximum contribution flexibility.

Key features:

• Highest potential contribution of the three options
• Roth option available
• Loan provisions available
• Requires annual Form 5500 filing once plan assets exceed $250,000

For most solo business owners, the Solo 401(k) offers the most flexibility and highest potential contributions. For simplicity, the SEP-IRA is hard to beat.

Want help choosing the right retirement plan and maximizing your tax savings? The Gap ProAdvisors provides tax planning for small business owners nationwide. Contact us.