Self-employed individuals and small business owners have access to retirement plans that can shelter substantial income from current tax while building long-term savings. The options differ in contribution limits, administrative burden, and flexibility, and the right choice depends on income, the number of employees, and how much an owner wants to set aside. Todd Muslow, a certified public accountant in Shreveport, Louisiana, helps owners compare these plans as part of annual tax planning.
The simplest option for a self-employed person with no employees is a SEP-IRA. Contributions are made by the business, are deductible, and can reach a meaningful percentage of compensation up to an annual limit. Setup is straightforward, and the plan can be established and funded up to the filing deadline, including extensions. That flexibility makes the SEP-IRA useful for owners who want to decide on a contribution after they see the year’s results. The tradeoff appears once a business has employees, because the owner must generally contribute the same percentage for eligible staff as for themselves.
A solo 401(k), sometimes called an individual 401(k), suits an owner with no employees other than a spouse. It allows contributions in two capacities. The owner contributes as an employee up to the elective deferral limit, then contributes again as the employer based on a percentage of compensation. The combination often permits a larger total contribution than a SEP-IRA at the same income level, particularly for owners with moderate earnings who want to save aggressively. The solo 401(k) carries more administrative steps and begins to require an annual information return once assets pass a threshold, but the higher contribution potential appeals to many owners.
A SIMPLE IRA fits small businesses with employees that want to offer a plan without the cost of a traditional 401(k). Employees can defer income, and the employer either matches contributions up to a set percentage or makes a fixed contribution for all eligible staff. Contribution limits are lower than a 401(k), but the plan is easier to administer, which makes it a practical starting point for a growing business.
For owners with high income who want to contribute more than these plans allow, a defined benefit plan may be worth examining. Structured like a traditional pension, it can permit much larger deductible contributions, calculated by an actuary based on a targeted retirement benefit. The plan requires ongoing funding commitments and professional administration, so it suits established businesses with steady, high earnings rather than companies with variable income. Todd Muslow notes that for the right owner, the deduction can be significant, but the commitment is real and should be entered into with a clear understanding of the annual obligation.
Timing matters here as well. Some plans must be established before year-end, while others can be set up after the year closes. An owner who waits until filing season may find that the most advantageous plan is no longer available for the prior year. Reviewing options during the year preserves the full range of choices.
These plans serve two purposes at once. They reduce current taxable income through deductible contributions, and they build retirement savings that grow tax-deferred. Todd Muslow treats the selection as part of a connected plan rather than an isolated decision, aligning retirement contributions with cash flow, entity structure, and the owner’s broader tax position. For many small business owners, a well-chosen plan is among the more effective tools available for managing taxes while preparing for the future.