Retirement Plan Tax Deductions

SEP IRA — simple and high-limit

A Simplified Employee Pension (SEP) IRA is the easiest retirement plan for a self-employed person with no employees. You contribute up to 25% of your net self-employment income, with a maximum contribution of $66,000 for 2026. There's no catch-up provision — but at $66,000, you probably don't need one.

SEP IRAs are employer-only contributions — you make contributions as the "employer" side of your business, so there's no employee deferral component. That makes it straightforward: calculate your net income, multiply by 20% (the effective rate after adjusting for self-employment tax), and that's your contribution. The actual rate is 25% of compensation, but after the SE tax adjustment it works out to 20% of net Schedule C income.

Setup is minimal. Most brokers — Vanguard, Fidelity, Schwab — let you open a SEP IRA online in under 15 minutes. There's no annual IRS filing requirement (no Form 5500), and you can skip contributions in lean years without penalty. If simplicity matters more than maxing out every dollar of contribution room, the SEP IRA is hard to beat.

Solo 401(k) — maximum tax savings

The Solo 401(k) — also called an individual 401(k) or self-employed 401(k) — gives you the highest possible contribution limits because you wear two hats: employee and employer. For 2026, the employee deferral is up to $23,000 (plus a $7,500 catch-up if you're 50 or older). Then, as the employer, you contribute up to 25% of compensation. The combined cap is $69,000 total, or $76,500 with catch-up.

The dual-contribution structure is what makes the Solo 401(k) so powerful at moderate incomes. A SEP IRA at $60,000 of net income only lets you contribute about $11,150. A Solo 401(k) at the same income level lets you contribute $23,000 as an employee plus roughly $11,150 as the employer — about $34,150 total. That's triple the deduction with the same income.

Solo 401(k)s also offer a Roth option at most providers. Roth contributions aren't deductible now, but they grow tax-free and come out tax-free in retirement. If you're in a lower bracket today than you expect in retirement, the Roth option is worth considering — though most self-employed people benefit more from the immediate tax deduction. You can also take loans from a Solo 401(k) — up to $50,000 or 50% of the account balance, whichever is less — a feature SEP IRAs don't offer.

The tradeoff: more paperwork. Once your Solo 401(k) balance exceeds $250,000, you have to file Form 5500-EZ annually. It's not complicated — mostly just reporting the account value — but it's an extra step SEP IRAs don't have. For most self-employed high earners, the higher contribution limits make this well worth the minor admin work.

SIMPLE IRA — low-limit, low-effort

A SIMPLE IRA (Savings Incentive Match Plan for Employees) lets you contribute $15,500 as an employee deferral for 2026, with a $3,500 catch-up for those 50 and older. As the employer, you match your own contribution at 3% of net earnings. The total cap is lower than SEP or Solo 401(k) plans, but setup and maintenance are dead simple.

SIMPLE IRAs work best for self-employed people with lower incomes who want something easy. If you're earning $30,000–$50,000 from freelancing, the $15,500 employee deferral plus a 3% match might already represent 35–50% of your income — the higher SEP and Solo 401(k) limits would go unused anyway. In that scenario, the SIMPLE IRA's simplicity wins.

One caveat: SIMPLE IRAs have a 2-year rule. You can't roll over funds to another retirement account within the first two years of participation without paying a 25% penalty (down from 10% in prior years). After two years, you can transfer the balance freely. If you think you might want to consolidate accounts soon, a SEP IRA may be a better starting point.

Traditional IRA — the universal option

A Traditional IRA is available to anyone with earned income, regardless of self-employment status. For 2026, the contribution limit is $7,000 (or $8,000 if you're 50 or older). Contributions are deductible above the line — they reduce your AGI on Schedule 1, no itemizing required.

There's a catch: if you (or your spouse, if filing jointly) are covered by a workplace retirement plan, the deduction phases out at higher incomes. For a single filer covered by a plan in 2026, the phase-out starts around $77,000 of modified AGI and phases out completely around $87,000. But if neither you nor your spouse is covered by a workplace plan — and your SEP IRA or Solo 401(k) from self-employment counts as coverage — there's no income limit on the deduction.

The Traditional IRA works best as a supplement to your main self-employed plan. Max out your Solo 401(k) or SEP IRA first (much higher limits), then add $7,000–$8,000 in a Traditional IRA on top. Combined, a 45-year-old could deduct $69,000 through a Solo 401(k) plus $7,000 through a Traditional IRA — $76,000 total in retirement deductions off a single year's income.

How the plans compare

Every plan has its tradeoffs. Here's how they stack up on the features that matter most for tax savings.

SEP IRA

• 2026 max contribution: $66,000 (25% of net SE income)
• Catch-up contribution: None — cap is already high
• Setup deadline: Tax filing deadline + extensions
• Annual IRS filing: None required
• Roth option: No
• Loan feature: No
• Best for: Solo operators earning $100k+ who want maximum simplicity

Solo 401(k)

• 2026 max contribution: $69,000 ($76,500 with catch-up)
• Catch-up contribution: $7,500 for age 50+
• Setup deadline: December 31 of the tax year (plan must be established)
• Annual IRS filing: Form 5500-EZ once balance exceeds $250,000
• Roth option: Yes, at most providers
• Loan feature: Yes, up to $50,000 or 50% of balance
• Best for: Self-employed individuals earning $60k–$300k who want maximum deductions

SIMPLE IRA

• 2026 max contribution: $15,500 employee + 3% employer match
• Catch-up contribution: $3,500 for age 50+
• Setup deadline: October 1 of the tax year (for that year)
• Annual IRS filing: None required
• Roth option: No
• Loan feature: No
• Best for: Lower-income self-employed or small businesses with a handful of employees

Traditional IRA

• 2026 max contribution: $7,000 ($8,000 with catch-up)
• Catch-up contribution: $1,000 for age 50+
• Setup deadline: Tax filing deadline (no extensions required)
• Annual IRS filing: None
• Roth option: Separate Roth IRA available
• Loan feature: No
• Best for: Supplementing a SEP or Solo 401(k) with extra tax-deductible savings

Real example: $100,000 self-employment income

Let's walk through what this looks like for a real self-employed worker in 2026. You're 40, single, with $100,000 in net Schedule C income and no employees. You want to max out your retirement deduction. Here's how the math plays out across plans:

The same person using a SEP IRA could contribute about $18,587 — the employer-side maximum alone. That's a $22,000+ smaller deduction than the Solo 401(k). The SIMPLE IRA would allow $15,500 plus roughly $3,000 in matching — about $18,500 total. The gap between plans is enormous at this income level.

Now add a Traditional IRA on top of the Solo 401(k): another $7,000 deduction, bringing the total to $48,587. That's nearly half of a $100,000 income shielded from current-year taxes. For more ways to stack deductions like this, see our self-employment tax deductions page.

Deadlines and setup rules

Retirement plan deadlines aren't all the same, and getting them wrong means losing an entire year of deductions. Here's what you need to know:

SEP IRA: You can open and fund a SEP IRA as late as your tax filing deadline including extensions — typically October 15 for most filers. This makes SEP IRAs the go-to last-minute option. If you're staring at a big tax bill in March, you can open a SEP IRA, fund it, and deduct it against the prior year's income.

Solo 401(k): The plan must be established by December 31 of the tax year. This means the paperwork needs to be signed and the account opened before the ball drops on New Year's Eve. You can fund it until your tax filing deadline (including extensions), but the plan itself must exist by year-end. If you're considering a Solo 401(k), don't wait until spring — set it up in December even if you're not sure how much you'll contribute.

SIMPLE IRA: Must be established by October 1 of the tax year. Funding deadline is the tax filing deadline with extensions, same as SEP.

Traditional IRA: Open and fund by the tax filing deadline (April 15 typically, no extension needed). Simple and consistent.

One more thing: contributions to SEP IRAs and Solo 401(k)s are discretionary. If you set up a plan but have a rough year, you can contribute zero with no penalty. If you have a great year, you can max it out. The flexibility is built in — use it. For practical advice on running the numbers, check our small business tax deductions guide.