Self-employed individuals and small business owners have access to retirement plan options with substantially higher contribution limits than what most W-2 employees can access through a workplace 401(k). Using these accounts aggressively is one of the most tax-efficient moves available.
SEP-IRA: simple and flexible
The Simplified Employee Pension IRA is the simplest retirement plan for self-employed individuals. Key characteristics:
- Contribution limit: up to 25% of net self-employment income, capped at $70,000 for 2025
- Contributions can be made until your tax filing deadline, including extensions — so a September extension means you can fund it as late as September 15
- No annual IRS filing requirements
- Immediate vesting for all employees — if you have employees, you must contribute the same percentage for them as you do for yourself
- No Roth option; contributions are always pre-tax
The SEP-IRA is ideal for sole proprietors and single-member LLCs without employees who want simplicity and flexible timing.
SIMPLE IRA: for small teams
The SIMPLE (Savings Incentive Match Plan for Employees) IRA is designed for small employers with up to 100 employees. Key characteristics:
- Employee contribution limit: $16,500 for 2025 ($20,000 if age 50 or older)
- Employer must either match employee contributions dollar-for-dollar up to 3% of compensation, or make a 2% non-elective contribution for all eligible employees
- Less administrative burden than a 401(k) but more than a SEP-IRA
- Cannot be used by businesses with an existing qualified retirement plan
Solo 401(k): the high-ceiling option
The Solo (or Individual) 401(k) is available to self-employed individuals and business owners with no employees other than a spouse. It combines employee and employer contribution components:
- Employee deferral: up to $23,500 for 2025 ($31,000 if age 50 or older) — must be elected and funded by December 31
- Employer contribution: up to 25% of net self-employment income
- Combined limit: $70,000 for 2025 ($77,500 with catch-up)
- Roth option available (after-tax contributions, tax-free growth)
- Loan provisions allowed, which SEP-IRAs and SIMPLE IRAs do not permit
A key Solo 401(k) advantage: a lower-income self-employed person can contribute a higher absolute amount by maxing the employee deferral ($23,500) even when 25% of net income would be less. A SEP-IRA is limited to 25% — there is no employee deferral component.
Choosing the right plan
For most sole proprietors with no employees and significant income, the Solo 401(k) offers the highest potential contribution and most flexibility. The SEP-IRA wins on simplicity and is excellent for those who value late contribution timing. The SIMPLE IRA fits small teams where administrative cost matters. A CPA can model all three against your actual income to show the comparison in dollars.
