Tim Dick, CFP®
Posted on Nov. 19, 2025
As a self-employed business owner, you need to wear a lot of hats. You’re the CEO, the head of marketing, a customer service rep, the billing department, and a maintenance worker on any given day. With all the time spent focusing on daily operations and visions for future growth, your own long-term retirement plan often gets pushed aside as an afterthought. However, setting up the right retirement plan for your situation is crucial to lowering your annual tax bill today and securing your financial independence tomorrow.
When it comes to evaluating the right retirement plan, self-employed professionals need to think strategically about setting up the right type of retirement vehicle that matches their earnings profile. Let’s look at a few different options.
1. Basic IRA (Traditional and Roth)
These plans are the easiest to set up, but for business owners who are serious about wealth accumulation, their low annual contribution limit is a major constraint. With a limit of just $7,500 in 2026 (plus a $1,100 catch-up for people over 50), IRAs simply don’t offer the savings capacity needed to build a substantial retirement fund.
Example Scenario: Your Etsy business generated $12,000 in Net Income from selling custom arts and crafts online. The maximum you can contribute is $7,500 annually.
Best for: Individuals with a side gig, who want to save a little extra money outside of their primary employer-sponsored retirement plan, like a 401(k).
2. SEP IRA (Simplified Employee Pension)
SEP IRAs are easy to adopt, generally simple to administer, but allow for greater contributions up to 25% [1] of compensation, making them a decent choice for more profitable businesses. A nice benefit is that employers are not mandated to make contributions each year, which is a welcomed reprieve for businesses with inconsistent income. Another perk is that SEPs can be established and funded up until the tax filing deadline for a given year. Therefore, an owner with a surprise tax bill after strong profits from the prior year can open and fund a SEP IRA before the tax deadline to alleviate some of the tax burden. A major consideration, though, for professionals with employees is that they must offer the plan to their employees and make contributions to each of their accounts proportionate to their compensation. Furthermore, SEPs only allow employer (profit-sharing) contributions, therefore participants cannot personalize their savings rate outside of what the employer provides.
Example Scenario: You earned $100,000 in Net Income from your car detailing business. You can contribute approximately $18,600 (~20%) to your own SEP IRA. Your employee who earns $50,000 in wages for the year gets a proportional SEP IRA contribution of $12,500 (25%).
Best for: Professionals with inconsistent or project-based income, such as a real estate broker or landscaper with some employees. Especially individuals looking for a last-minute tax deduction for prior year income.
[1] The calculation for the employers’ own contribution limit equals ~20% of their compensation.
3. Solo 401(k) Plans
The Solo 401(k) is the gold standard for self-employed professionals who don’t have full-time employees (other than a spouse). Its primary advantage lies in its dual contribution feature, allowing you to contribute as both an employee and an employer, maximizing your total savings potential.
A. As the Employer (Profit-Sharing): Like a SEP IRA, you can contribute up to 25% of employee compensation.
B. As an Employee (Salary Deferral): You can contribute a flat dollar amount up to the annual limits ($24,500 in 2026, plus $8,500 for people 50 and older) or your total profits, whichever is less.
The upshot is that the Solo 401(k) allows you to effectively save a much larger portion of your income, which means you can plan more strategically about how to best meet your goals. For high earners looking to lower their taxable income, they can defer up to $72,000 in 2026 (plus $8,000 for catch-up). Then again, someone looking to supercharge their tax-free savings can make their Roth 401(k) contributions at much higher levels than a basic Roth IRA.
Taking the strategy a step further, Solo 401(k)s can facilitate complex tax planning for self-employed professionals, particularly concerning the Qualified Business Income (QBI) deduction, an advantageous tax break available to eligible businesses. For higher earners who are phased out, making large pre-tax deferral contributions to a Solo 401(k) could lower their taxable income and help them preserve or reclaim some of the QBI deduction. However, in other situations, Roth contributions may be preferable to pre-tax so that the business owner avoids reducing their QBI deduction unnecessarily.
While Solo 401(k)s were traditionally considered complicated to administer due to high start-up costs, requisite non-discrimination testing, and tax form filings, new technologies and custodian platforms have now enabled seamless creation and simple, hands-off record-keeping. These modern providers handle the heavy administrative lifting, including necessary compliance updates and tax form preparation, making the Solo 401(k) as practical to manage as a simple SEP IRA.
Example Scenario: You own a law practice earning approximately $400,000 year. While you don’t have employees, your spouse works part-time answering phones and maintaining the office space. After a strong year in 2026, you want to maximize your retirement savings. You contribute $24,500 to both you and your spouse’s Solo 401(k) and $8,000 catch-up contributions, since you’re over 50. You also make maximum profit-sharing contributions of $47,500 to both accounts. In total you’ve saved $160,000 in tax-advantaged retirement accounts in one year.
Best for: High earners without employees looking to supercharge their retirement savings in a meaningful way.
Take Action
Now that you understand some of the options at your disposal, take the next step and develop the right retirement plan for you—one that fits your income level, supports your tax strategy, and grows with your business over time. Too many self-employed professionals delay this decision and ultimately miss years of tax-advantaged compounding. By taking action now, you give yourself the opportunity to lower your taxes, increase your savings capacity, and create a roadmap for long-term financial freedom.
Merrimack Wealth Management is a member firm of The Fiduciary Alliance, LLC which is an Investment Adviser registered with the Securities and Exchange Commission. The Fiduciary Alliance’s business operations, services, and fees is available at the SEC’s investment adviser public information website www.adviserinfo.sec.gov or from The Fiduciary Alliance upon request.