Self-employed individuals have access to some of the most powerful retirement savings vehicles in the tax code—but the variety of options and the complexity of contribution calculations cause many business owners to leave significant tax savings on the table. Whether you are a sole proprietor, a single-member LLC, or a partner in a professional firm, understanding the available retirement plan options and how they compare is essential to maximizing your tax-deferred savings.
Solo 401(k)
The solo 401(k)—also called an individual 401(k) or one-participant 401(k)—is available to self-employed individuals with no common-law employees (other than a spouse). It allows both employee deferrals and employer profit-sharing contributions, making it the most flexible option for most self-employed individuals.[1]
For 2025, the employee deferral limit is $23,500 ($31,000 for those age 50+ with standard catch-up; $34,750 for ages 60-63 under the SECURE 2.0 enhanced catch-up). In addition, the employer can contribute up to 25 percent of net self-employment income (after the deduction for one-half of self-employment tax), subject to a combined limit of $70,000 ($77,500 with standard catch-up). A solo 401(k) can also accept Roth contributions, allowing the self-employed individual to build a tax-free retirement account.
The solo 401(k) is generally the best option for self-employed individuals with high income, because the employee deferral component allows for contributions that are dollar-for-dollar, regardless of income level—unlike the SEP IRA, which ties contributions to a percentage of income.
SEP IRA
The Simplified Employee Pension (SEP) IRA is the simplest retirement plan to establish and administer. Contributions are made entirely by the employer (no employee deferrals), up to 25 percent of net self-employment income, with a maximum of $70,000 for 2025. The plan can be established and funded as late as the filing deadline (including extensions) for the tax year in question—making it the only option for business owners who want to make a prior-year contribution after the calendar year has ended.[2]
The SEP IRA's simplicity comes at a cost: there is no employee deferral component, no Roth option (though SECURE 2.0 authorized Roth SEP contributions, implementation guidance is still pending), and the contribution is limited to a percentage of income. For a self-employed individual with $100,000 of net income, the maximum SEP contribution is approximately $18,587 (after adjustments), compared to a solo 401(k) contribution of up to $42,087 ($23,500 deferral + $18,587 profit-sharing).
SIMPLE IRA
The Savings Incentive Match Plan for Employees (SIMPLE) IRA is designed for small businesses, including self-employed individuals, with 100 or fewer employees. The employee deferral limit for 2025 is $16,500 ($20,000 for ages 50+; $21,750 for ages 60-63). The employer must either match employee contributions dollar-for-dollar up to 3 percent of compensation, or make a non-elective contribution of 2 percent of compensation for all eligible employees.[3]
The SIMPLE IRA has lower contribution limits than either the solo 401(k) or the SEP IRA, making it less attractive for high-income self-employed individuals. However, it may be appropriate for businesses with employees, where the mandatory employer contribution obligation is modest.
Defined Benefit Plans
For self-employed individuals with very high income and a desire to shelter substantially more than the defined contribution limits allow, a defined benefit (DB) plan can be a powerful tool. A DB plan promises a specified retirement benefit (typically based on years of service and compensation), and the annual contribution is whatever amount the actuary determines is necessary to fund that benefit. For older business owners with high income and relatively few years until retirement, the required contribution can be $200,000 or more per year—far exceeding the $70,000 defined contribution limit.[4]
The tradeoff is complexity and cost: DB plans require annual actuarial certifications, are subject to minimum funding requirements, and have ongoing administrative expenses of $2,000 to $5,000 per year. They also require a multi-year commitment—funding obligations must be met even in lean years.
Stacking Plans
Self-employed individuals can operate multiple retirement plans simultaneously, subject to certain coordination rules. The most common combination is a defined benefit plan plus a solo 401(k) or profit-sharing plan. This allows the business owner to contribute the maximum to the defined contribution plan and the actuarially determined amount to the defined benefit plan, potentially sheltering $250,000 or more per year in total contributions.
The key limitation is that all contributions must be based on the same earned income, and the combined plans must satisfy the aggregate limits and nondiscrimination rules. A tax advisor experienced in business tax planning should be consulted before implementing a stacked plan strategy.[5]