Retirement accounts are the most powerful tax reduction tool available to self-employed individuals and business owners. Unlike most deductions, contributions to retirement accounts don't require you to spend money on something else — you're simply moving money from your taxable pocket to your tax-advantaged pocket.
The Three Main Options for Self-Employed Individuals
SEP-IRA (Simplified Employee Pension)
The SEP-IRA is the simplest option. Contribute up to 25% of net self-employment income, maximum $69,000 for 2025. You can open one and fund it up to your tax filing deadline (including extensions). No annual filing requirements. The downside: you can't make employee contributions, and if you have employees, you must contribute the same percentage for them.
Solo 401(k)
The Solo 401(k) is more powerful for high earners. As the employee, you can contribute up to $23,000 ($30,500 if 50+). As the employer, you can contribute up to 25% of compensation. Combined, the limit is $69,000 ($76,500 if 50+). The Solo 401(k) also allows Roth contributions and loans — features the SEP-IRA doesn't offer.
Key difference: On $100,000 of net self-employment income, a SEP-IRA allows ~$18,587 in contributions. A Solo 401(k) allows up to $41,587 ($23,000 employee + $18,587 employer). The Solo 401(k) wins for most high earners.
Defined Benefit Plan
For high earners over 50 who want to shelter the maximum amount, a defined benefit plan can allow contributions of $200,000+ per year. These are complex and expensive to administer, but the tax savings can be extraordinary for the right situation.
Traditional vs. Roth: Which Is Better?
Traditional contributions reduce your taxable income now; you pay taxes when you withdraw in retirement. Roth contributions don't reduce current taxes, but withdrawals in retirement are completely tax-free. The right choice depends on whether you expect to be in a higher or lower tax bracket in retirement. For most high-income business owners, traditional contributions make more sense now.
The Deadline Trap
SEP-IRA contributions can be made up to your tax filing deadline (October 15 with extension). Solo 401(k) plans must be established by December 31 of the tax year, though contributions can be made until the filing deadline. Don't wait until April to think about this — you may have missed the window to establish the account.
Related Resource
More questions about retirement accounts and tax strategy for self-employed individuals?
Our Tax Planning FAQ covers SEP-IRA vs Solo 401(k) comparisons, Defined Benefit Plans, contribution deadlines, and how retirement accounts interact with your overall tax plan.
Every dollar you contribute to a retirement account is a dollar that doesn't get taxed this year. At a 32% marginal rate, a $50,000 SEP-IRA contribution saves $16,000 in federal taxes alone. That's not a small number.
Tiffany Nellums, EA
Tiffany Nellums, EA
Tiffany is an IRS Licensed Enrolled Agent and NAEA member with over 10 years of experience helping business owners, real estate investors, and high-income earners reduce their tax burden through proactive planning and strategic structuring.