Best Retirement Plan Options for the Self-Employed: SEP IRA, Solo 401(k), and Beyond

Why Retirement Plans Are Your Best Tax Tool

A retirement plan contribution does two things simultaneously: it removes money from your current-year taxable income (reducing your tax bill now) and grows it tax-deferred until retirement (compounding without annual capital gains or dividend taxes). This dual benefit makes retirement contributions the most tax-efficient use of business income available to self-employed individuals.

Here is the math for a self-employed business owner at a 35% combined federal and state tax rate:

The difference between contributing the minimum and the maximum — over a 20-year career — is millions of dollars. And the tax savings in year one alone at the $66,000 level ($23,100) often exceeds the cost of financial advisory services by a significant multiple.

SEP IRA: Simple and Powerful

The Simplified Employee Pension (SEP) IRA is the easiest retirement plan to set up for a self-employed individual. You can open one in 15 minutes at most brokerages with minimal paperwork, and you have until the tax filing deadline (including extensions) to make contributions for the prior year. That flexibility is a genuine advantage.

SEP IRA Key Details

• Contribution limit: Lesser of 25% of net self-employment income or $66,000 (2023); $69,000 (2024)
• Net SE income note: "Net self-employment income" for SEP purposes is net profit minus half of SE tax minus the SEP contribution itself — which creates a circular calculation that reduces the effective rate to approximately 18.6% of gross self-employment income
• Establishment deadline: Can be established and funded up to the tax filing deadline including extensions
• No catch-up contributions: Unlike the Solo 401(k), there is no additional catch-up contribution for those 50+
• Employees: If you have eligible employees, you must make the same percentage contribution to their accounts — which can make SEP IRAs expensive for businesses with employees
• No loans: SEP IRA funds cannot be borrowed against
• Investment options: Virtually any investment available in a traditional IRA

When the SEP IRA Is the Right Choice

• You want simplicity and minimal administrative work
• You have high net self-employment income (above ~$265,000, where SEP catches up to Solo 401k limits)
• You want to wait until filing to decide on contribution amounts
• You missed the December 31 Solo 401(k) establishment deadline

Solo 401(k): The Best Option for Most Self-Employed

The Solo 401(k) (also called an Individual 401(k) or Self-Employed 401(k)) is, in most cases, the best retirement plan for self-employed individuals with no full-time employees. It allows the highest contributions at lower income levels by combining employee and employer contributions.

How the Solo 401(k) Works

A Solo 401(k) has two contribution components:

• Employee elective deferral: Up to $22,500 in 2023 ($30,000 if 50+) — this is limited to your compensation (W-2 wages if you are an S-Corp; self-employment income if you are a sole proprietor). You can contribute 100% of compensation up to this limit, regardless of how profitable your business is.
• Employer profit-sharing contribution: Up to 25% of W-2 wages (for S-Corp owners) or approximately 18.6% of net self-employment income (for sole proprietors), up to $66,000 total combined limit ($73,500 with catch-up)

Why Solo 401(k) Beats SEP IRA at Lower Income Levels

At lower income levels, the employee deferral component of the Solo 401(k) allows far higher contributions than the SEP IRA's 25% formula. Example:

Below approximately $265,000 in net SE income, the Solo 401(k) consistently allows larger contributions — and therefore larger tax deductions — than the SEP IRA.

Defined Benefit Plans: For High Earners Ready to Accelerate

A defined benefit (DB) plan is the most powerful retirement savings vehicle available to self-employed individuals — and the most complex. Unlike defined contribution plans (like 401(k)s and SEPs, where you contribute up to a limit), a DB plan promises a defined monthly benefit at retirement, and your annual contributions are calculated actuarially to fund that promised benefit.

The result: a business owner in their 50s with high income can potentially contribute $150,000 to $275,000+ per year — generating $52,500 to $96,250+ in annual tax savings at a 35% rate. The maximum benefit in 2023 is $265,000 per year in retirement income, funded by current contributions.

Who Should Consider a Defined Benefit Plan

• Consistent high income: $300,000+ net per year, stable or growing
• Age 50 or older (younger owners have longer to fund benefits, so required contributions per year are lower)
• Serious about building retirement wealth rapidly (funding requirements are mandatory and inflexible year-to-year)
• Willing to accept annual actuarial fees ($2,000–$5,000/year) and plan administration costs
• High effective tax rate (the deduction is worth more the higher your rate)

DB Plan Caveats

• Contributions are required each year based on the actuarial calculation — you cannot simply skip a year like you can with a SEP IRA
• Terminating a DB plan early can have tax consequences
• If you have employees, the plan must cover them, which significantly increases cost
• Combined plans: a DB plan can be paired with a 401(k) to allow even higher total contributions

Plan Comparison: Which Is Right for You?

If You Have Employees: SIMPLE IRA and Traditional 401(k)

The Solo 401(k) and solo plan approach only works if you have no full-time W-2 employees other than yourself (and your spouse, who can participate in a Solo 401k). If you have employees, your options shift:

• SIMPLE IRA: For businesses with 100 or fewer employees. Employee deferrals up to $15,500 (2023) plus a required employer contribution (either a 2% non-elective contribution or 3% match). Simpler than a 401(k) but lower limits. Mandatory employer contribution regardless of profitability can be a drawback.
• SEP IRA with employees: Still available but requires the same contribution percentage for all eligible employees — expensive for businesses with multiple employees.
• Traditional 401(k) plan: Allows the same employee deferral limits as a Solo 401(k) plus employer match or profit-sharing. Much more flexible for businesses with employees and allows the business owner to maximize their own contributions while providing a benefit to employees. Higher setup and administration cost but the most flexible option.

Critical Deadlines You Cannot Miss

Missing a retirement plan deadline does not just cost you this year's deduction — it can cost you years of compounded tax-deferred growth on contributions you could have made. These deadlines are firm.

• December 31: Solo 401(k) plan must be established by this date to contribute for the current tax year. Employee elective deferrals must also be elected by December 31.
• December 31: Defined benefit plan must be established by this date for current year contributions.
• Tax filing deadline (typically April 15): SEP IRA can be established and funded up to this date, including extensions. Solo 401(k) employer profit-sharing contributions can also be made by this date even if the plan was established by December 31.
• Extension deadline (typically October 15): With an extension, SEP IRA and Solo 401(k) employer contributions can be made up to this date.

The December 31 Solo 401(k) deadline is the one that causes the most pain. If your year-end planning conversation happens in November, you have time to establish the plan. If it happens in February, you have missed the window.

For dentists and medical professionals looking at how retirement planning integrates with practice tax strategy, see: The Dentist's Guide to Building $1M+ in Retirement Wealth Through Your Practice. For the broader picture of how retirement planning fits into overall tax strategy: 6 Tax Planning Strategies Every Small Business Owner Should Be Using.

Frequently Asked Questions