Self-employed individuals have unique opportunities to save for retirement while reducing their current tax liability. Choosing the right retirement plan can significantly impact both your future savings and your current tax bill.
IRS Tax Code Reference
Several Internal Revenue Code sections govern retirement plans for the self-employed, notably:
- IRC §401(k) — Solo 401(k) plans
- IRC §408(k) — Simplified Employee Pension (SEP IRA)
- IRC §408(p) — Savings Incentive Match Plan for Employees (SIMPLE IRA)
Relevant IRS Forms:
- Form 5305-SEP — Simplified Employee Pension – Individual Retirement Accounts Contribution Agreement
- Form 5500-EZ — Annual Return of One-Participant (Owners and Their Spouses) Retirement Plan (if required)
- Schedule 1 (Form 1040) — for claiming retirement contributions
Top Retirement Plans for the Self-Employed
- Solo 401(k)
Ideal for:
- Solo entrepreneurs
- Freelancers with no full-time employees (other than a spouse)
Benefits:
- Employee deferral limit: Up to $23,000 for 2025
- Catch-up contribution (age 50+): Additional $7,500
- Employer profit-sharing contribution: Up to 25% of net earnings
Total maximum contribution for 2025:
Up to $69,000 (plus catch-up if eligible).
Tax advantage: Contributions reduce taxable income directly.
- SEP IRA
Ideal for:
- Business owners with fluctuating income
- Those wanting low administrative costs
Benefits:
- Contribution limit: Up to 25% of net earnings, capped at $69,000 for 2025.
- Easy setup with minimal paperwork (using Form 5305-SEP).
Tax advantage: Employer contributions are deductible as a business expense.
- SIMPLE IRA
Ideal for:
- Small businesses with 100 or fewer employees
- Self-employed individuals seeking simpler rules
Benefits:
- Employee contribution limit: Up to $16,000 for 2025
- Employer match: Dollar-for-dollar up to 3% of compensation.
Tax advantage: Contributions lower taxable income and allow for simple administration.
Example:
Scenario:
- Net self-employment earnings: $100,000
- Solo 401(k) contribution:
- Employee deferral: $23,000
- Employer contribution (25% of net earnings): $25,000
Total contribution:
$48,000, reducing taxable income significantly.
Step-by-Step Compliance Checklist
- Analyze your expected income and savings goals.
- Select the most suitable retirement plan (Solo 401(k), SEP IRA, SIMPLE IRA).
- Set up the plan using proper IRS-approved documents.
- Make contributions before deadlines (Solo 401(k) must be established by December 31, 2025).
- File any required returns like Form 5500-EZ if plan assets exceed $250,000.
Important Points to Remember
- Contributions to retirement plans can also reduce self-employment tax by lowering net earnings.
- Roth Solo 401(k) options are available for tax-free withdrawals in retirement (no immediate deduction).
- SEP IRA contributions must be made by the due date of the tax return (including extensions).
Conclusion
Choosing the right retirement plan as a self-employed individual can maximize your tax benefits today and build wealth for tomorrow. Each plan has different advantages depending on your income level, goals, and administrative preferences.
Consulting with a CPA can ensure you pick the right plan and stay fully compliant with IRS rules.
Schedule a meeting with Anshul Goyal, CPA to design your ideal self-employed retirement strategy for 2025:
https://calendly.com/anshulcpa/
FAQs
Q1: Can I have both a Solo 401(k) and a SEP IRA?
Technically yes, if they cover different businesses, but contribution limits apply across all plans combined.
Q2: Is a Solo 401(k) better than a SEP IRA?
A Solo 401(k) generally allows higher contributions for lower income levels.
Q3: When must I set up a Solo 401(k)?
By December 31 of the tax year (December 31, 2025, for 2025 contributions).
Q4: Are Roth contributions allowed for Solo 401(k)?
Yes, many Solo 401(k) plans offer a Roth component for after-tax contributions.
Q5: What are the penalties for missing contribution deadlines?
Late establishment or contributions can disqualify deductions and lead to IRS penalties.
About Our CPA
Anshul Goyal, CPA, EA, FCA, is a licensed Certified Public Accountant in the United States, authorized to represent clients before the IRS as an Enrolled Agent. Anshul specializes in self-employment tax planning, retirement strategies, and cross-border tax compliance for American businesses and individuals.