If you are self-employed, consider contributing to specialized retirement plans, some of which may allow larger contributions than normally allowed to employees.
Simplified Employee Pension Individual Retirement Account (“SEP IRA”):
A SEP IRA is a retirement savings plan that allows tax-deductible contributions to retirement accounts for self-employed owners and any employees that they may have. Assets in the plan grow tax free and are taxable when they are withdrawn.
The maximum contribution for 2026 is the lesser of 25% of the employee’s total compensation or $72,000. In general, contributions must be completed by the due date of the owner’s individual tax filing (April 15th or Oct 15th if they filed an extension).
Please note that a SEP IRA requires that the self-employed employer make contributions for himself/herself as well as any employees at the same rate. Employers make all contributions to the plan and employees are not allowed to make any salary deferrals into the plan. Due to this requirement, this type of plan is generally not very appealing for self-employed individuals with employees.
SEP IRAs are flexible retirement plans. Once the contributions are made by the employer, the employee has complete control of their SEP account and can direct how the moneys are invested. There is also no requirement to make a contribution year-after-year. As a result, the SEP IRA tends to have lower maintenance fees compared to other retirement plans.
Solo 401K (or Self-Employed 401K):
Solo 401Ks are an amalgamation of SEP IRA and a traditional 401k plan. These plans can allow for even higher retirement contributions than a SEP IRA, but eligibility restrictions are greater. This retirement account can be opened only by self-employed individuals who have no other employees.
For 2026, Solo 401Ks allow for a 401k contribution as if the self-employed individual was an employee in the amount of $24,500. In addition, the self-employed individual can also contribute an additional amount up to 25% of the total business’ net earnings. The total aggregate contribution you can make if you are under 50 years old is $72,000. For example, if your business earned $100,000 of net income during the year, the self-employed owner (you) can contribute $24,500 as a 401k plan contribution and approximately $25,000 (or 25% of $100K) for a total contribution of $49,500.
In addition, those individuals who are age 50 or over at the end of the calendar year can make annual catch-up contributions. Annual catch-up contributions can be up to $8,000 in 2026. In addition, individuals between the ages of 60 and 63 can make an additional $11,250 catch-up contribution.
As is the case for SEP IRAs, the employer contribution is due when the tax filing for the year is due the following year. However, the employee contribution generally must be made in the same calendar year as the contribution (for example, 2026 contributions will be due December 31st, 2026).
Please note that if your Solo 401K balance exceeds $250,000 at the end of the year, you will have to file an additional tax Form 5500-EZ. Forming and maintaining a Solo 401K is slightly more complicated than operating a SEP IRA.
Cash Balance Defined Benefit Plan:
If a self-employed individual would like to contribute even greater amounts than allowed under a SEP-IRA or Solo 401k, the self-employed individual might consider more complex plans such as a Cash Balance Defined Benefit Plan. These plans work to achieve a future hypothetical account balance and contributions to the plan are determined by an actuary based on the participant’s age, compensation, and retirement goals.
While these plans do allow for higher contributions by self-employed individuals, they also are highly technical and require coordination with experts who can administer and fulfill all reporting requirements for these plans.
Realize Can Help
Self-employed individuals have many options when considering retirement plans. We are happy to review all advantages and disadvantages for all plans available to our clients according to their unique financial situations and goals.
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