SEP-IRA, SIMPLE IRA, and Solo 401(k) Plans
Retirement plan contributions are one of the most powerful tax reduction tools available to self-employed individuals and small business owners — allowing pre-tax income to be sheltered in plans that defer taxation until retirement, potentially decades away. The choice among plan types significantly affects how much can be contributed and at what administrative cost.
A SEP-IRA (Simplified Employee Pension) allows contributions of up to 25% of net self-employment compensation (approximately 20% of net Schedule C income after the SE tax deduction) up to $69,000 in 2024. SEP-IRAs require no annual IRS filings, are easy to establish and administer, and allow the contribution deadline to be extended to the tax return due date (including extensions). The primary limitation: if a business has employees, the same percentage must be contributed for all eligible employees, making SEP-IRAs expensive for businesses with a workforce.
A Solo 401(k) (also called an Individual 401(k) or i401k) is available only to self-employed individuals with no full-time employees other than a spouse. It allows contributions as both employee and employer: the employee elective deferral component allows up to $23,000 in 2024 ($30,500 if age 50+) regardless of income; the employer profit-sharing component adds up to 25% of W-2 wages (for S corp owners) or approximately 20% of net self-employment income (for sole proprietors). The combined limit is $69,000 ($76,500 if 50+). For lower-income self-employed individuals, the Solo 401(k)'s elective deferral component allows much higher contributions than a SEP-IRA — a freelancer earning $50,000 can contribute $23,000 to a Solo 401(k) but only about $9,300 to a SEP-IRA.