Use Tax-Advantaged Accounts for Business Owners

Use Tax-Advantaged Accounts for Business Owners

When it comes to saving for retirement, business owners have unique advantages thanks to tax-advantaged retirement accounts designed specifically for self-employed individuals and small business owners. Two of the most popular options are the SEP IRA and the Solo 401(k). Both offer meaningful tax benefits and flexibility, but they function differently. If you’re self-employed or run a business with no employees other than your spouse, understanding how these accounts compare is essential for maximizing long-term retirement savings.

A SEP IRA allows business owners to contribute up to 25% of their net earnings, with a contribution cap of $66,000 for 2024. One of the biggest benefits of a SEP IRA is its simplicity. It’s easy to set up, has minimal administrative requirements, and doesn’t require annual filings with the IRS. Contributions are discretionary, meaning you can adjust how much you contribute each year based on cash flow. However, SEP IRAs do have limitations. Because contributions are capped at a percentage of income, high earners may not be able to maximize contributions as efficiently as they could with other plans. SEP IRAs also do not offer Roth contributions, so all savings grow on a tax-deferred basis.

A Solo 401(k), by contrast, offers more flexibility and higher contribution potential for many business owners. It allows you to contribute both as the employee and the employer. As the employee, you can defer up to $23,000 in 2024, or $30,500 if you’re over age 50. On top of that, you can make employer contributions of up to 25% of your net earnings. This structure often allows business owners to contribute more at lower income levels compared to a SEP IRA. Another advantage is the availability of a Roth option, which allows after-tax contributions that can be withdrawn tax-free in retirement.

Choosing between a SEP IRA and a Solo 401(k) depends on several factors, including income level, retirement goals, and desired flexibility. While both plans can significantly reduce current taxable income, the Solo 401(k) often provides greater control, higher contribution opportunities, and additional features that appeal to business owners focused on maximizing retirement savings.

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