Retirement Accounts That Cut Your Tax Bill: SEP-IRA, SIMPLE IRA & Solo 401(k)

The Dual Benefit Most Business Owners Are Missing

Retirement accounts for business owners serve two purposes simultaneously: they build long-term wealth and they reduce your taxable income right now. A $50,000 contribution to a retirement plan isn't just money you're setting aside — it's money that never gets taxed this year, freeing up capital and reducing your IRS bill in the same motion.

Yet the majority of self-employed business owners we talk to have never set up a business retirement account. Some assume they're too small. Some assume the paperwork is too complicated. Some simply didn't know the contribution limits were this high.

Here's the full picture.

SEP-IRA: The Easiest to Start

A Simplified Employee Pension IRA (SEP-IRA) is the most accessible retirement account for self-employed business owners and solo practitioners. It requires minimal paperwork to establish and has one of the most flexible funding timelines of any plan type.

• 2025 contribution limit: Up to 25% of net self-employment income (after the SE tax deduction), maximum $69,000
• Who contributes: Only the employer (you) — there are no employee salary deferrals in a SEP-IRA
• Deadline to establish: Can be set up and funded up to your tax filing deadline including extensions — so as late as October 15 for sole proprietors
• Investment options: Available through any major brokerage (Fidelity, Vanguard, Schwab, etc.) — you choose how to invest the funds
• Employees: If you have employees, you must contribute the same percentage of their compensation that you contribute for yourself. This makes SEP-IRA expensive for businesses with multiple employees.

For a sole proprietor with $150,000 net SE income, the maximum SEP-IRA contribution is approximately $26,756 (25% of net SE income after the half-SE-tax deduction). That contribution reduces your federal and NC state taxable income by the same amount.

SIMPLE IRA: Best for Small Teams

A Savings Incentive Match Plan for Employees (SIMPLE IRA) is designed for small businesses with employees. It's more complex than a SEP-IRA but allows for employee salary deferrals — which makes it attractive when you want employees to share in the retirement savings benefit.

• 2025 employee deferral limit: Up to $16,000 per year (plus $3,500 catch-up contribution if age 50 or older)
• Employer contribution: Required — either a 3% matching contribution (matches employee deferrals dollar for dollar up to 3% of compensation) or a 2% non-elective contribution (2% of all eligible employees' compensation whether they contribute or not)
• Deadline to establish: Must be set up by October 1 of the year in which it will first be effective — unlike SEP-IRA, you cannot establish it retroactively at tax filing time
• Who benefits most: Business owners with a small number of employees who want to offer a retirement benefit as part of their compensation package
• Early withdrawal penalty: Unusually harsh — 25% penalty (instead of the standard 10%) if withdrawn within the first 2 years of participation

Solo 401(k): Most Powerful for Self-Employed

The Individual 401(k) (also called Solo 401(k) or Self-Employed 401(k)) is the most powerful retirement savings vehicle for business owners with no full-time employees other than a spouse. It combines the features of both an employee and employer plan, allowing significantly higher contribution levels at lower income levels than a SEP-IRA.

• Employee (salary deferral) contribution: Up to $23,000 in 2025 ($30,500 if age 50 or older) — this is a flat dollar limit, not a percentage of income
• Employer (profit sharing) contribution: Up to 25% of W-2 compensation (for S-Corp owners) or approximately 20% of net SE income (for sole proprietors)
• Combined 2025 limit: $69,000 total ($76,500 with catch-up contribution if age 50+)
• Deadline to establish: Plan must be established by December 31 of the tax year. Employee deferrals must be made from payroll before December 31. Employer profit sharing can be funded up to your filing deadline.
• Roth option: Many Solo 401(k) providers offer a Roth option — contributions go in after-tax, but grow and are withdrawn tax-free in retirement
• Loan option: Solo 401(k) plans often allow loans of up to 50% of the vested balance or $50,000 — not available in SEP-IRA or SIMPLE IRA
• Employees: Generally cannot have full-time employees (other than a spouse) — if your business grows and you hire employees, you'll need to transition to a different plan type

Why Solo 401(k) Often Beats SEP-IRA at Mid-Range Income

At lower income levels, the Solo 401(k)'s flat employee deferral limit makes it far superior to the SEP-IRA's percentage-based limit. Example for a sole proprietor with $80,000 net SE income:

• SEP-IRA maximum: approximately $14,130 (25% of net SE income after SE tax deduction)
• Solo 401(k) maximum: $23,000 employee deferral + approximately $11,304 employer contribution = approximately $34,304

At $80,000 income, the Solo 401(k) allows more than double the contribution of a SEP-IRA.

Defined Benefit Plan: For High Earners 50+

A Defined Benefit (DB) Plan is the most powerful retirement savings tool available to business owners — but also the most complex. Instead of defining how much you contribute, it defines how much benefit you'll receive in retirement, and then an actuary calculates how much you need to contribute annually to fund that benefit.

• Contribution levels: Can exceed $200,000/year for owners in their 50s — far exceeding the limits of any other plan type
• Best fit: High-income business owners (typically $300K+ net income) who are in their 50s or 60s and want to catch up on retirement savings while dramatically reducing their current tax bill
• Complexity: Requires an actuary to calculate annual required contributions; mandatory annual contribution regardless of business profitability; more complex IRS reporting
• Combination strategy: Many high earners combine a DB plan with a Solo 401(k) to maximize both limits simultaneously

Which Plan Is Best for You?

• Solo owner, no employees: Start with a Solo 401(k). It offers the highest contribution limits relative to income, has a Roth option, and allows loans. Once established, it covers almost every scenario.
• Has employees: Consider a SIMPLE IRA (simpler administration) or a traditional 401(k) with a third-party administrator (more complex but more flexible). SEP-IRA is also an option but requires equal percentage contributions for all eligible employees.
• Just starting, needs flexibility: SEP-IRA is the easiest to open and has the most flexible funding timeline — you can wait until you file to decide how much to contribute.
• High earner 50+, wants maximum savings: Defined Benefit Plan, potentially combined with a Solo 401(k). Run the numbers with an actuary.

NC Tax Benefit: Double Your Savings

North Carolina conforms to federal retirement account deduction rules. This means the same contributions that reduce your federal taxable income also reduce your NC state taxable income. At NC's 4.75% flat rate, a $50,000 retirement contribution saves you an additional $2,375 in NC taxes on top of your federal savings. For taxpayers in the 32% federal bracket, the combined federal + NC effective marginal rate on that contribution is 36.75% — meaning $50,000 contributed effectively costs you only $31,625 out of pocket.

Timing Your Contributions

• Solo 401(k): Must be established by December 31 of the year you want the deduction. Employee salary deferrals must come from actual compensation before year-end. Employer profit-sharing portion can be funded up to your filing deadline (April 15, or October 15 with extension).
• SEP-IRA: Can be established AND fully funded up to your filing deadline plus extensions — the most flexible timing of any plan type.
• SIMPLE IRA: Must be established by October 1. Employee deferrals happen via payroll throughout the year. Employer matching is made per payroll period.
• Defined Benefit: Must be established by December 31. Annual required contributions must be made on a timely basis as calculated by your actuary.