Tax-Advantaged Retirement Plans for the Self-Employed
Self-employed individuals can reduce their taxable income significantly through Solo 401(k) or SEP-IRA contributions. Unlike employees who rely on employer-sponsored plans, freelancers and sole proprietors must set up their own retirement accounts. Both plans allow pre-tax contributions that directly reduce federal income tax for the year contributed.
SEP-IRA vs. Solo 401(k)
SEP-IRA allows contributions of up to 25% of net self-employment income (max $69,000 for 2024) and is easy to set up. Solo 401(k) allows higher contribution limits by combining employee and employer contributions, and also permits catch-up contributions for those 50 and older. The right choice depends on your income level and administrative preferences.
How Tax Savings Are Calculated
Your eligible contribution amount multiplied by your marginal federal tax rate gives an approximation of your federal income tax savings. State taxes may add further savings depending on your state's treatment of retirement contributions.
Frequently Asked Questions
Up to 25% of net self-employment income, or $69,000 (2024), whichever is lower.
Contributions reduce your taxable income dollar-for-dollar. Tax savings = contribution × marginal tax rate.
Generally no. Consult a tax professional to determine the best plan for your situation.