Vlad Rusz is a CPA at Centaur Digital Corp, helping busy business owners efficiently manage their accounting systems.
There are a plethora of ways to save for retirement. Setting money aside in a savings account or stuffing it into your mattress are simple, relatively risk-free ways to save, but these strategies offer little to no significant return on your money. While any investment or savings can be a retirement investment or savings, the government has designated special accounts that provide beneficial tax treatment with certain strings attached.
Those who are traditionally employed might be offered a 401(k) from their employer, which can be supplemented with other investments such as real estate or mutual funds. For those who are self-employed, there are various qualified retirement accounts, including the 401(k), that can be utilized to maximize tax savings.
Deciding which account is right for you can be daunting. Let’s discuss some of the pros and cons of the accounts available for solopreneurs—meaning small-business owners who are either doing the work entirely on their own or utilizing contractors but have no other W2 employees. We will focus primarily on contribution limits rather than the qualification rules or nuances of distributions from these qualified retirement accounts.
Traditional Vs. Roth
Let’s first define traditional and Roth accounts. All the accounts listed below are available as traditional retirement accounts, in which the contributions are tax-deductible when made, but the distributions are taxable when taken. These traditional accounts are often referred to as “tax-deferred” because while you don’t pay tax yearly on the growth, you will eventually pay tax on the growth when you withdraw money from the account.
Alternatively, a Roth account does not provide a tax deduction for the contributions. They are made after tax. A Roth account can be referred to as “tax-free” because the distributions, which include the growth in the account, are not taxable.
All the accounts discussed are available as traditional or Roth accounts except SEP and SIMPLE IRAs, although you can roll over the balances from either into a Roth IRA to essentially achieve the same result.
Types Of Accounts
The best retirement account for a solopreneur will depend primarily on your income level and desired contribution amount. Your accountant or tax professional can identify your income level, and your financial advisor can help you determine your desired contribution amount. When you have both numbers, you are ready to choose an appropriate account.
IRA
The individual retirement account (IRA) is available to everyone, not just business owners. This account is the simplest to set up but offers the lowest maximum contribution of $7,000 (for 2025) of all the accounts. Additionally, there are income limits for both the traditional and the Roth accounts, which make this account either nondeductible or ineligible for high earners.
SEP IRA
The simplified employee pension (SEP) IRA allows a business to contribute up to 25% of compensation, with a total maximum of $70,000 (for 2025) toward an employee’s retirement. There are no income limits and this account is generally easy to set up. Additionally, this account and the contribution can be set up at any point before the tax return is filed. One disadvantage is that if your compensation is low, the contribution amount will also be small.
SIMPLE IRA
The Savings Incentive Match Plan for Employees (SIMPLE) IRA allows a business owner to contribute $16,500 (for 2025), plus it allows the business to match contributions up to 3% of compensation. There are no income limits and, like a SEP, this account is easy to set up.
A SIMPLE IRA makes sense for small-business owners who want to contribute between $7,000, which is the regular IRA limit, and $16,500. The disadvantage is that it only provides a modest boost to the maximum contribution compared to a regular IRA, and it must be set up before October 1 of the current year.
Solo 401(k)
A solo 401(k) plan generally allows the maximum contribution for solopreneurs who want to make a large contribution but don’t have an especially large W2 or compensation from their own business. The contribution limit is $23,500 (for 2025) for the business owner plus 25% of compensation for the business, for a total maximum of $70,000 (for 2025).
The disadvantage is that the initial setup is complicated, and while it can be DIY’d, it’s recommended to use a specialized service provider. Additionally, there might be tax filing requirements specifically for the 401(k) once asset size reaches a certain level.
Defined Benefit Plan
A defined benefit plan is primarily used by older high-earning solopreneurs who wish to maximize contributions in anticipation of retirement. It allows those close to retirement in their typically highest years of earnings to take the highest deduction. Unfortunately, it also carries the highest setup and maintenance costs.
The contribution amount is based on actuarial data, which must be updated annually. While the other accounts can be set up for free (IRA, SEP IRA, SIMPLE IRA) or a nominal fee (solo 401(k) plan), a defined benefit plan typically costs a few thousand dollars.
Finding The Right Account
Picking the right account to open for your solo business doesn’t have to be a daunting task. Once you’ve established or estimated your income level and contribution amount, it’s easy to find the right account. Reach out to your accountant and financial advisor for guidance throughout this process.
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