The Best Sole Proprietorship Retirement Plans to Reduce Your 2024 Tax Bill

March 06, 2025

SCENARIO: You operate your business as a sole proprietorship or a single-member LLC that is treated as a sole proprietorship for tax purposes. Therefore, the tax code considers you self-employed.
You have no employees.
You’ve not yet set up a self-employed retirement plan for yourself. What? You’re missing out on what could be significant annual tax savings.
It’s time to jump on the retirement plan bandwagon. Thankfully, it’s not too late to set up a plan and get a deductible contribution on your 2024 Form 1040 (yep, the return you are about to file).

Here are your self-employed retirement plan options:

Simplified Employee Pension

The Simplified Employee Pension (SEP) is a stripped-down retirement plan intended for self-employed individuals and small employers.1
At the beginning of this article, we stipulated that you are self-employed and have no employees.
As a self-employed individual, you can make a deductible contribution of up to 20 percent of your net selfemployment income to your SEP account. Net self-employment income usually equals the net profit shown on
Schedule C or F minus the above-the-line deduction for 50 percent of self-employment tax.²
For 2024, contributions to your SEP account cannot exceed $69,000.³

SEP Pros

You can quickly establish a SEP at almost any brokerage firm or financial institution. You fill out Form 5305-SEP, which takes about five minutes. Done! It does not get any easier than this!
After you establish the SEP, you have essentially no administrative details to worry about. The government does not currently require any reporting for one-person SEPs.
You can establish a SEP as late as the extended due date of the return for the tax year for which you make your initial deductible contribution.
If you have a healthy net self-employment income, a SEP permits generous annual deductible contributions—up to $69,000 for your 2024 tax year. When cash is tight, you always have the flexibility to contribute less than the allowable maximum or nothing.
Example: You operate your business as a single-member LLC treated as a sole proprietorship for tax purposes. You extend your 2024 return due date to October 15, 2025. You have until that date to:

establish your SEP
make the initial contribution, and
deduct that contribution on your 2024 Form 1040.

Since the contribution is for your 2024 tax year, the maximum is $69,000. So, if your 2024 net selfemployment income is $345,000 or higher, you can contribute the maximum ($345,000 x 20 percent = $69,000).
Technical point. You now know that you can establish your 2024 SEP and make contributions up to the extended due date for your tax return.⁴ If you are using this method, make sure to:

file a valid extension request,
file the return during the extension period, and
contribute to the SEP during the extension period.

SEP Cons

Depending on your age and net self-employment income, you may enable larger annual deductible contributions to your retirement plan account with a solo 401(k), SIMPLE IRA, or defined benefit pension plan.
Borrowing from a SEP account is prohibited. Borrowing is allowed from the other types of accounts covered in this analysis—except for SIMPLE IRA accounts. SEP accounts and SIMPLE IRAs are considered IRAs. The tax code prohibits borrowing from an IRA.⁵

Conclusion on SEPs

If you have a healthy net self-employment income and want maximum simplicity, the SEP option may be your best bet.

Defined Contribution Keogh Plan

You can establish a self-employed defined contribution Keogh plan. Deductible contributions are limited to 20 percent of net self-employment income, with a cap of $69,000 for 2024.⁶
Net self-employment income usually equals the net profit shown on Schedule C or F minus the above-the-line deduction for 50 percent of self-employment tax.⁷

Pros for Keogh Plans

If you have a healthy net self-employment income, a defined contribution Keogh plan permits generous annual deductible contributions of up to $69,000 for 2024. This is the same as with a SEP. And as with a SEP, you have the flexibility to contribute less than the allowable maximum, or even nothing at all, when cash is tight.
Also as with a SEP, you can establish a Keogh plan as late as the extended due date of the return for the year for which you make your initial deductible contribution.
If the plan permits, you can borrow from your Keogh account, subject to a maximum loan amount calculated under a complicated rule. The absolute maximum you can borrow is $50,000.⁸
Brokerage firms and financial institutions offer “prototype plans” with check-the-box formats. They are relatively easy and inexpensive to establish.
Key point: If your business has one or more employees, the tax rules may require you to make contributions for them. With a defined contribution Keogh plan, you can exclude from coverage employees who are under age 21 and employees who have not worked at least 1,000 hours during any 12-month period.⁹
You can use this exclusion rule to employ youngsters and part-time workers to operate a plan that benefits only you.

Cons for Keogh Plans

Once your account balance exceeds $250,000, you must file IRS Form 5500-EZ (Annual Return of One-Participant Retirement Plan) each year.¹⁰

Conclusion on Keogh Plans

If you have no employees, Keogh plans have no advantages over SEPs unless you value being able to borrow from your account.

SIMPLE IRA

Another option for self-employed individuals is the SIMPLE IRA. As you will see, it can be the best choice if your business produces only modest income.

SIMPLE IRA Contribution Basics

For 2024 (assuming you have your 2024 plan in place), you can contribute in 2025 up to the lesser of (1) 100 percent of your net self-employment income or (2) $16,000. This is considered an elective deferral contribution made by you as a self-employed individual.
You can then make a matching contribution of up to 3 percent of your net self-employment income.¹¹

Example: You run your shop as a single-member LLC treated as a sole proprietorship for tax purposes. In 2024, you have $25,000 of net self-employment income.
You contribute the maximum $16,000 to your SIMPLE IRA and claim a $16,000 deduction on Form 1040. You then make a matching contribution of $750 (3 percent × $25,000) and deduct another $750 on Form 1040. Your combined deductible contributions add up to $16,750.
In contrast, with a SEP or defined contribution Keogh plan, your maximum deductible contribution would be only $5,000 (20 percent × $25,000).

Catch-up Contributions

If you are age 50 or older as of December 31, 2024, you can make an additional catch-up elective deferral contribution of up to $3,500 for your 2024 tax year.12 So, the maximum combined elective deferral contribution is $19,500 ($16,000 + $3,500).
Example: In 2024, you have $25,000 of net self-employment income. You could contribute up to $20,250 to a SIMPLE IRA ($16,000 basic elective deferral contribution + $3,500 catch-up contribution + $750 matching contribution). In contrast, the most you could contribute to a SEP or defined contribution Keogh plan would be only $5,000 (20 percent × $25,000).

SIMPLE IRA Pros

When your business produces a modest income, the SIMPLE IRA arrangement can permit much healthier annual deductible contributions to your self-employed retirement account.
A solo 401(k) might permit even larger deductible pay-ins, as we will explain later in this analysis. Nevertheless, you might prefer the SIMPLE IRA option because it is somewhat easier and less expensive to establish and operate than a solo 401(k) plan, and because you may not be able to afford larger contributions anyway.
SIMPLE IRA elective deferral contributions are entirely discretionary. If you make no elective deferral contribution for the year, you don’t make any matching contribution.
You establish a SIMPLE IRA by filling out a fairly easy plan document available at most brokerage firms and financial institutions. There is no requirement to file any annual reports with the federal government.¹³

SIMPLE IRA Cons

If your self-employed business produces more than a modest amount of net self-employment income, the SIMPLE IRA is not the best choice if you want to maximize your deductible retirement plan contributions.
You must establish a SIMPLE IRA by October 1 of the year for which the initial deductible contribution will be made.14 So, the opportunity to set up a SIMPLE IRA for 2024 is in your rearview mirror. But you could set one up for this year before October 1, 2025.
You can’t borrow from your SIMPLE IRA account. In contrast, borrowing is allowed under the other types of plans covered in this analysis (assuming the plan document permits), except for SEPs.¹⁵

Conclusion on SIMPLE IRAs

When your business generates only a modest amount of self-employment income, the SIMPLE IRA is the best choice to maximize your annual deductible contributions.

Solo 401(k)

Another self-employed retirement plan alternative is the solo 401(k).
Because of the logistics involved in getting elective deferral contributions into your solo 401(k) account, we assume you have the solo 401(k) in place on or before December 31, 2024. If not, follow the strategies below by getting your 401(k) plan in place now for 2025.
Advantage. You can potentially make more significant annual deductible contributions to your account.
Key point. You may see the solo 401(k) called a mini-401(k), a uni-401(k), a one-person 401(k), and so on. All these terms describe a 401(k) plan that covers only you, the business owner. This makes the plan exempt from complicated non-discrimination and coverage rules that “regular” multi-participant 401(k) plans have to deal with.

Solo 401(k) Contribution Basics

With a solo 401(k), annual deductible contributions to your account can be composed of two pieces:

Elective deferral contributions
Employer contributions (yes—you, the self-employed taxpayer, get to make these)

Elective Deferral Contributions

For 2024, you can contribute up to $23,000 of net self-employment income to your solo 401(k) account. The elective deferral contribution limit rises to $30,500 if you will be age 50 or older as of year-end. The $30,500 figure includes the extra $7,500 catch-up contribution allowed for older 401(k) plan participants for 2024.¹⁶

Employer Contributions

On top of the elective deferral contribution to your solo 401(k) account, you can contribute up to 20 percent of your net self-employment income.
The additional pay-in is considered an employer contribution even though you make the contribution yourself. With a plan set up for a sole proprietorship or a single-member LLC treated as a sole proprietorship for tax purposes, the owner (that would be you) is treated as his or her own employer. Therefore, you make the employer contribution on your own behalf.17
Key point. The combined elective deferral and employer contributions generally cannot exceed 100 percent of your net self-employment income.
Consider the following example to see how elective deferral and employer contributions can add up to big numbers.
Example: You operate your business as a sole proprietorship or as a single-member LLC treated as a sole proprietorship for tax purposes. In 2024, you have net self-employment income of $80,000 (after subtracting the above-the-line deduction for 50 percent of self-employment tax).
The maximum deductible contribution to your solo 401(k) account is $39,000. That consists of a $23,000 elective deferral contribution and a $16,000 employer contribution (20 percent x $80,000). $39,000 is way above the $16,000 maximum contribution you could make to a SEP or defined contribution Keogh account (20 percent x $80,000).
The $23,000 difference is due to the solo 401(k) elective deferral contribution privilege.
Variation: Now say you will be age 50 or older as of December 31, 2024. The maximum contribution to your solo 401(k) account is $46,500 [$23,000 plus $7,500 catch-up contribution plus $16,000 employer contribution (20 percent × $80,000)].
That is way, way above the $16,000 maximum contribution you could make to a SEP or defined contribution Keogh account (20 percent × $80,000).
The $30,500 difference is due to the solo 401(k) elective deferral and catch-up contribution privileges.

Solo 401(k) Advantage Shrinks at Higher Income Levels

If you have more than $80,000 of net self-employment income (assumed in the preceding example), you can contribute more to your solo 401(k) account—up to the applicable dollar cap.
If you are under age 50, the 2024 cap on combined elective deferral and employer contributions is $69,000.18
If you are age 50 or older, the 2024 cap is $76,500, thanks to the $7,500 catch-up contribution allowed for older 401(k) plan participants ($69,000 + $7,500 = $76,500).¹⁹

Example: In 2024, you have net self-employment income of $345,000 (after subtracting the above-the-line deduction for 50 percent of self-employment tax). You can contribute a maximum of $69,000 to a solo 401(k) plan.
You could contribute the same $69,000 to a SEP (20 percent × $345,000 = $69,000).
In this case, the SEP option may be the better choice than the solo 401(k) option, because a SEP is easier and cheaper to operate.
Variation: Now say that you are age 50 or older with 2024 self-employment income of $345,000. You can contribute a maximum of $76,500 to a solo 401(k) plan, thanks to the $7,500 catch-up contribution allowed to older 401(k) plan participants ($69,000 + $7,500 = $76,500).
The solo 401(k) offers a $7,500 advantage over a SEP, thanks to the catch-up contribution privilege. But a solo 401(k) is not as simple and cheap to operate as a SEP.

The impact of the dollar caps on contributions to a solo 401(k) plan can be summarized as follows:

If you are under age 50, the $69,000 cap for 2024 causes the solo 401(k) advantage over a SEP to shrink and eventually disappear between net self-employment income of $230,000 and $345,000.
If you are age 50 or older, the solo 401(k) will always permit larger annual deductible contributions than a SEP, thanks to the catch-up contribution privilege. As a result, the 401(k) cap for 2024 for those age 50 and older is $76,500 versus only $69,000 for the SEP.

Solo 401(k) Pros

If you are a one-person self-employed business owner who hates to leave any tax break on the table, the solo
401(k) option can be seductive. You often can make larger annual deductible contributions to your solo 401(k).
You can always contribute less than the allowable maximum or even nothing for years when cash is tight. So, the solo 401(k) can facilitate major tax savings in the good years, when you can make generous deductible contributions, while permitting lower contributions in lean years when conserving cash is a priority.
Within strict limits, you can borrow from a solo 401(k) account (assuming the plan document so permits). In contrast, you cannot borrow from a SEP or a SIMPLE IRA.

Solo 401(k) Cons

Unlike a SEP, a solo 401(k) is not something you should attempt to establish and operate without professional assistance. Up-front paperwork and ongoing administrative efforts are required, including adopting a written plan document and arranging for how and when elective deferral and employer contributions will be paid into your account.
Fortunately, many outfits, including some large brokerage firms, are ready and willing to handle solo 401(k) plans.
The annual elective deferral contribution maximum ($23,000 for 2024, or $30,500 for those age 50 and older) applies cumulatively to all 401(k), 403(b), and SIMPLE plans in which you participate.²⁰
Making an elective deferral contribution to a plan at your regular job reduces the maximum elective deferral contribution you can make to a solo 401(k). When this consideration curtails elective deferral contributions to the solo 401(k), the whole idea has less appeal.
Example: In 2024, you make a $10,000 elective deferral contribution to the 401(k) plan at your regular job. If you are under age 50, the maximum elective deferral contribution to a solo 401(k) set up for your side business would be $13,000 ($23,000 cumulative maximum minus $10,000).

Once your solo 401(k) account balance exceeds $250,000, you must file IRS Form 5500-EZ (Annual Return of One-Participant Retirement Plan) annually.²¹ SEPs and SIMPLE IRAs are exempt from any such filing requirement.

Conclusion on Solo 401(k) Plans

For a one-person self-employed business, the solo 401(k) can be the best retirement plan choice if any of the following are true:

You want to make larger annual deductible contributions to your account than would be allowed with a SEP or defined contribution Keogh plan.
You have substantial net self-employment income, but not so much that you lose the solo 401(k) advantage over SEPs and defined contribution Keogh plans.
You are age 50 or older and can take advantage of the catch-up elective deferral contribution privilege offered with the solo 401(k) option.
You are not already making significant elective deferral contributions to another 401(k) plan, 403(b) plan, or SIMPLE IRA plan at a regular job.

Defined Benefit Plans

We did not cover the defined benefit pension plan option, which can be attractive if you want to make really big annual deductible contributions. The major negative for defined benefit plans is that you must engage an actuary who makes actuarially determined contributions as opposed to totally discretionary contributions with the types of plans we covered here.

Takeaways

If you’re a self-employed business owner operating as a sole proprietorship or single-member LLC with no employees, setting up a retirement plan can unlock significant tax savings for your 2024 return. Key options include:

SEP IRA. Ideal for simplicity and high-income years, allowing contributions up to $69,000 for 2024 with minimal administrative hassle.
Keogh plan. Offers similar contribution limits to a SEP with the added benefit of loan options, but requires additional reporting if the account exceeds $250,000.
Solo 401(k). Provides the highest contribution potential, especially if you’re age 50 or older, but involves more paperwork and administration. Borrowing is permitted, unlike with SEP or SIMPLE accounts.

The SIMPLE IRA cannot produce a 2024 tax deduction if you did not have it in place on October 1, 2024. But it’s a good plan for modest incomes, allowing contributions up to $19,500 if you’re age 50 or older.
Each plan has unique advantages depending on your income level, age, and administrative preferences. Don’t miss the chance to establish a plan and maximize your deductible contributions for 2024—there’s still time if you act before your tax return deadline.

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Sources:

1 IRC Section 408(k).

2 IRC Sections 401(c)(2); 402(i);404(h);408(k)(8)(B); 414(s); 415(c)(3)(B).