Self-employed individuals and small business owners have several retirement savings options available, including traditional IRAs, Roth IRAs, SEP IRAs, SIMPLE IRAs, Solo 401(k) plans, and more advanced plan designs for higher-income business owners.
Choosing the right plan depends on income level, business structure, cash flow, employees, tax goals, administrative complexity, and how much the owner wants to contribute. The right answer for a sole proprietor may be different from the right answer for an S corporation owner, a partnership, or a business with employees.
This article provides a high-level overview of common retirement plan options for self-employed individuals and business owners.
Business owners often focus heavily on growing the business, paying taxes, managing payroll, and serving customers. Retirement planning can become an afterthought.
However, retirement plans can provide several benefits:
For many business owners, retirement planning is also tax planning.
A traditional IRA is one of the simplest retirement savings options. Contributions may be deductible depending on the taxpayer’s income, filing status, and whether the taxpayer or spouse is covered by a workplace retirement plan.
Traditional IRA contributions may be useful for self-employed individuals who do not have a business retirement plan or who want to make additional retirement contributions outside of the business.
For 2026, the IRA contribution limit is $7,500, with an additional catch-up contribution available for eligible taxpayers age 50 or older. The IRS announced the 2026 IRA contribution limit and related phaseout ranges in its annual retirement limit update. (irs.gov)
A Roth IRA does not generally provide a current-year tax deduction, but qualified withdrawals may be tax-free.
Roth IRAs can be attractive for taxpayers who expect to be in a higher tax bracket later, want tax diversification, or prefer tax-free retirement growth.
However, Roth IRA eligibility is subject to income limitations. For 2026, the IRS announced that the Roth IRA income phaseout range is $153,000 to $168,000 for single filers and heads of household, and $242,000 to $252,000 for married taxpayers filing jointly. (irs.gov)
Higher-income business owners may not be eligible to make direct Roth IRA contributions, although backdoor Roth IRA planning may be considered in some cases.
A backdoor Roth IRA generally involves making a nondeductible traditional IRA contribution and then converting the amount to a Roth IRA.
This can be useful for taxpayers whose income is too high for direct Roth IRA contributions. However, the strategy can create unexpected tax consequences if the taxpayer has other pre-tax IRA balances.
The pro rata rule may cause part of the Roth conversion to be taxable if the taxpayer owns traditional IRAs, SEP IRAs, or SIMPLE IRAs with pre-tax funds.
Before using a backdoor Roth strategy, taxpayers should review:
Backdoor Roth planning should be reviewed before year-end and before large IRA balances are created.
A SEP IRA, or Simplified Employee Pension, is a common retirement plan for self-employed individuals and small business owners.
A SEP IRA is relatively easy to set up and administer. Contributions are made by the employer, not through employee salary deferrals. For self-employed individuals, contributions are based on net self-employment income after applying special calculation rules.
For 2026, SEP contributions generally cannot exceed the lesser of 25% of compensation or $72,000. SEP plans do not allow elective salary deferrals or catch-up contributions. (irs.gov)
For sole proprietors and partners, the calculation is not simply 25% of net profit. Self-employed individuals must use a special calculation that takes into account self-employment tax and the deduction for the contribution itself. The IRS provides specific guidance for calculating retirement plan contributions for self-employed individuals. (irs.gov)
SEP IRAs can be attractive because they are:
SEP IRAs can be especially useful for self-employed individuals with no employees or with employees where the owner is comfortable making required contributions for eligible employees.
A SEP IRA may become expensive if the business has employees. Contributions generally must be made for eligible employees using the same percentage of compensation as the owner.
For example, if the owner contributes 20% of eligible compensation for themselves, the business may need to contribute the same percentage for eligible employees.
SEP IRAs also do not allow employee elective deferrals or catch-up contributions. This may make a Solo 401(k) more attractive for an owner-only business that wants to maximize contributions at lower income levels.
A Solo 401(k), also known as an individual 401(k) or one-participant 401(k), is designed for a business owner with no employees other than a spouse.
A Solo 401(k) can allow larger contributions than a SEP IRA at certain income levels because the owner may be able to contribute in two ways:
For 2026, the general 401(k) employee deferral limit is $24,500, with additional catch-up contributions available for eligible participants age 50 or older. The overall defined contribution limit for 2026 is $72,000, before applicable catch-up contributions. (irs.gov; irs.gov)
The IRS describes one-participant 401(k) plans as plans covering a business owner with no employees, or that person and their spouse. (irs.gov)
A Solo 401(k) may be attractive because it can allow:
For a self-employed individual or S corporation owner with no employees, a Solo 401(k) can be one of the most powerful retirement planning tools available.
A Solo 401(k) has more administration than a SEP IRA. The owner must establish and operate the plan properly, follow the plan document, track contributions, and monitor filing requirements.
A Form 5500-EZ may be required once plan assets exceed the applicable threshold or when the plan is terminated. Missing plan filings can create penalties.
A Solo 401(k) may also become problematic if the business later hires employees. Once eligible employees exist, the plan may no longer be a true owner-only plan and additional compliance requirements may apply.
A SIMPLE IRA can be useful for small businesses with employees. It is generally available to businesses with 100 or fewer employees and is designed to be easier to administer than a traditional 401(k).
For 2026, the standard SIMPLE IRA contribution limit is $17,000, with a catch-up contribution limit of $4,000 for eligible participants age 50 or older. Under SECURE 2.0, a higher catch-up contribution limit may apply for participants who are ages 60 through 63. The IRS also notes that certain employers may qualify for higher contribution limits under SECURE 2.0. (irs.gov; irs.gov)
SIMPLE IRAs generally require the employer to make either matching contributions or nonelective contributions for eligible employees.
A SIMPLE IRA may be attractive for businesses that:
SIMPLE IRAs can be a good middle ground between no plan and a more complex 401(k).
SIMPLE IRAs have lower contribution limits than 401(k) plans and generally require employer contributions.
They also restrict the employer from maintaining another retirement plan in many cases.
For owner-only businesses, a Solo 401(k) or SEP IRA may provide more flexibility or larger contributions.
For businesses with employees, SIMPLE IRAs should be compared against a small business 401(k) and SEP IRA before implementation.
A traditional small business 401(k) may be appropriate for businesses with employees that want higher contribution limits, more plan design flexibility, Roth options, vesting schedules, profit sharing, or advanced retirement planning.
A 401(k) plan can allow employees to defer wages while the employer may make matching or profit-sharing contributions. However, 401(k) plans also involve more administration, plan documents, nondiscrimination testing, Form 5500 filings, and coordination with a third-party administrator.
A small business 401(k) may be appropriate when the owner wants to contribute more than a SIMPLE IRA allows and is willing to handle additional compliance requirements.
High-income business owners may consider defined benefit plans or cash balance plans. These plans can allow much larger contributions than SEP IRAs or 401(k) plans, especially for older business owners with high income.
However, these plans are more complex and typically require actuarial calculations, annual administration, and consistent funding.
They may be worth considering for business owners who:
These plans should be evaluated with a retirement plan specialist, actuary, and tax advisor.
The retirement contribution calculation depends heavily on business structure.
A sole proprietor generally calculates contributions based on net earnings from self-employment, after adjustments for self-employment tax and the retirement contribution calculation itself.
An S corporation shareholder-employee generally bases retirement plan contributions on W-2 wages paid by the S corporation, not shareholder distributions. This is one reason reasonable compensation planning is important.
For example, an S corporation owner who takes very low W-2 wages may limit their ability to contribute to a retirement plan, even if the business is profitable and distributions are high.
Partners and LLC members taxed as partners may have retirement contributions based on self-employment earnings, including guaranteed payments and certain allocations of partnership income, depending on the facts.
The calculation can be more complicated than a standard employee contribution because partner compensation is not reported on Form W-2. Contributions must be coordinated with the partnership return,
Schedule K-1 reporting, self-employment tax, and the plan document.
Partnerships should review retirement planning before year-end to avoid surprises.
S corporation owners should coordinate retirement planning with:
Retirement contributions for S corporation owners generally depend on wages, not distributions. This means payroll must be handled correctly during the year.
Retirement planning becomes more complicated when the business has employees.
A plan that works well for an owner-only business may become expensive or impractical once employees are hired.
Business owners should consider:
Before adopting a plan, owners should understand both the owner benefit and the employee cost.
Different plans have different setup and funding deadlines. Some plans must be established before year-end, while others may allow setup or funding after year-end.
Because deadlines depend on plan type, entity type, and current law, business owners should review retirement planning well before the tax filing deadline. Waiting until after year-end can limit available options.
Taxpayers should also confirm whether contributions are deductible for the business, deductible on the individual return, treated as employee deferrals, or made as Roth contributions.
Some retirement plans allow Roth contributions, while others are primarily pre-tax.
Pre-tax contributions may reduce current taxable income, while Roth contributions do not provide a current deduction but may allow tax-free qualified withdrawals later.
The choice between Roth and pre-tax contributions depends on:
Business owners should coordinate Roth and pre-tax planning with their broader tax strategy.
Common retirement plan mistakes for self-employed individuals and business owners include:
These mistakes can result in missed deductions, excess contributions, penalties, amended returns, or retirement plan compliance problems.
Self-employed individuals and business owners should consider:
The best retirement plan is not always the one with the highest contribution limit. It is the plan that fits the business owner’s income, employees, tax goals, administrative capacity, and long-term planning needs.
Assume a self-employed consultant has no employees and wants to reduce taxable income while saving for retirement.
The owner may consider a SEP IRA or Solo 401(k). If income is moderate, a Solo 401(k) may allow a larger contribution because the owner can make employee deferrals in addition to employer-style contributions.
If simplicity is the top priority, a SEP IRA may be easier to administer.
The right choice depends on income, age, cash flow, desired contribution amount, and administrative preferences.
Assume an S corporation owner takes W-2 wages from the business and also receives shareholder distributions.
Retirement plan contributions are generally tied to W-2 wages, not distributions. If the owner wants to maximize retirement contributions, reasonable compensation and payroll planning should be reviewed before year-end.
This is especially important when the owner is considering a Solo 401(k), SEP IRA, SIMPLE IRA, or small business 401(k).
Assume a business owner has several employees and wants to create a retirement plan.
A SEP IRA may require contributions for eligible employees if the owner contributes for themselves. A SIMPLE IRA may allow employee salary deferrals with required employer contributions. A 401(k) may provide more flexibility but also more administration.
The best choice depends on the employee census, owner goals, contribution budget, and desired complexity.
Foothills Accountants assists self-employed individuals and business owners with retirement contribution planning, entity-specific tax considerations, S corporation wage planning, SEP IRA and Solo 401(k) comparisons, SIMPLE IRA considerations, tax projections, and year-end planning.
We help clients understand how retirement contributions fit into the broader tax picture, including business income, payroll, QBI, estimated taxes, and cash flow.
Retirement planning is most effective when coordinated before year-end. A thoughtful plan can help business owners save for the future while managing current tax obligations.
This Content is for informational purposes only. Nothing contained herein constitutes accounting, tax, financial, investment, legal or other professional advice, and, accordingly, the author and the distributor assume no liability whatsoever in connection with its use. This Content is not an exhaustive explanation of any topic, practice or process. You should seek the advice of a licensed professional before making any accounting, tax, financial, investment or legal decision.
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