Ask an Advisor: I'm Self-Employed and Make $100k. How Can I Save More for Retirement and Get the Largest Tax Deduction?
I’m self-employed and own a karate studio in California, which is an S corporation. I have two employees. I don’t have any kind of 401(k) or IRA set up, though I do have approximately $180,000 in U.S. Bonds. My challenge is that I make around $100,000 annually and have very few tax deductions since I sold my home a few years back. I’m basically semi-retired and travel quite a bit. I have zero debt but I obviously want to reduce my tax bill. Which vehicle (401k, IRA, etc.) would give me the largest tax deduction. Does it make sense to pull money out of my bonds which only earn 4.5% for these purposes?
– Karl
This is a great question. Several retirement plan options exist for self-employed individuals, and each has its own nuances that you should consider. But before walking you through some potential options, let’s set a foundation for how you can approach the situation.
A financial advisor can help you manage your retirement savings and potentially find tax savings. Connect with an advisor today.
As with any financial planning question, it’s imperative that you start with your goals. What are you truly solving for personally? Is the main objective reducing this (or future) year’s tax liability? Or is it something bigger, like being able to fully retire soon, funding an active travel calendar or leaving a legacy to family members?
When outlining your personal goals, think about other integral components of a financial plan, such as your current and future cash needs, your existing and anticipated health, insurance coverage and gaps, and other assets beyond your bond portfolio. A prudent plan typically addresses more than just taxes.
But don’t stop at your personal goals. After all, you are a business owner and your retirement plan decision may have a direct impact on the cash flow your business generates and the money your employees earn. Some retirement plans require matching contributions for staff, which can increase costs and reduce your bottom line. Balancing business-level objectives with your personal goals is key, as solving for only one may introduce unintended consequences for the other.
(A financial advisor can help you map out your financial goals and build a plan for reaching them.)
There are three primary retirement plans for self-employed individuals: Simplified Employee Pensions (SEP IRAs), SIMPLE IRAs and Solo 401(k)s. Traditional and Roth IRAs may also be suitable if a business-level plan doesn’t align with your goals.
A SEP IRA allows you to contribute up to 25% of your W-2 wages or $70,000, whichever is less in 2025. Given the high deferral limits and ease of setup, SEP IRAs are popular among self-employed workers. However, the catch is that contributions are entirely employer-directed and you must contribute the same percentage for all eligible employees, making them expensive. They also do not offer a Roth option, so all deferrals are pre-tax and subject to required minimum distributions (RMD) rules.
SIMPLE IRAs, which offer lower deferral amounts, remain popular among small businesses with employees. These accounts allow deferrals up to 100% of compensation capped at $16,500 in 2025 for those under 50, or $20,000 for those age 50 and older. Employers typically must choose between two contribution options: matching employee contributions up to 3% of their pay or providing a fixed 2% contribution for every eligible employee, regardless of whether they contribute.
SIMPLE IRAs are generally easier and less expensive to administer than Solo 401(k)s but come with lower contribution limits and no Roth option. (A financial advisor can help you examine your financial needs and build a retirement plan that accounts for them.)
Solo 401(k)s are a great option for high earners given their high deferral limits and flexibility, but they but may not be available depending on your staffing situation given your staffing situation since they are only for businesses with no employees other than a spouse. We won’t go into full details as a result, but they offer similar contribution limits to SEP IRAs while also allowing for a Roth feature, which aids in tax diversification and can reduce or eliminate future RMD obligations.
If none of the above fit your personal and business goals, consider a traditional or Roth IRA. They are the simplest to implement but will make the smallest dent in your tax bill. Contribution limits for both in 2025 are set at $7,000 if you’re under 50 and $8,000 for those age 50 or older. If you’re currently under the income threshold for direct Roth contributions, be mindful that eligibility could change in the future.
In a vacuum without knowing your other goals, a SEP IRA will offer the highest contribution potential, and potentially the largest tax deduction, depending on your income and tax bracket. You could contribute $25,000 on a pre-tax basis, reducing your taxable earnings to $75,000, but you would also need to contribute 25% on behalf of each of your employees. This could add up depending on their salaries. If these employer contributions aren’t feasible, then a SIMPLE IRA is a worthwhile alternative with smaller employer obligations, but also lower contribution limits.
(Consider matching with a financial advisor and exploring a more in-depth assessment of your situation.)
While a SEP IRA should make the biggest impact on your tax bill, be sure to weigh this with your non-tax personal and business goals. Does adding 25% for your employees affect your earnings to the point where the power of the plan’s deferral limits is negated? Would a SIMPLE IRA more effectively balance personal and business goals? Would focusing solely on personal savings through a traditional or Roth IRA be more suitable? Before leaping to a decision, think through what you’re trying to solve for, since it often isn’t limited to tax optimization.
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Not all financial advisors offer the same services or depth of knowledge. If you own a business, receive equity compensation or are planning for multi-generational wealth transfers, seek out an advisor with experience in those areas. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
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Coordinate your asset allocation with a thoughtful withdrawal plan. Tapping taxable accounts first, followed by tax-deferred, then Roth accounts, may reduce tax drag and preserve long-term wealth. However, Roth-first strategies can work better when early Social Security or low income years create a temporary tax window.
Jeremy Suschak, CFP®, is a SmartAsset financial planning columnist who answers reader questions on personal finance topics. Got a question you’d like answered? Email AskAnAdvisor@smartasset.com and your question may be answered in a future column.
Jeremy is a financial advisor and head of business development at DBR & Co. He has been compensated for this article. Additional resources from the author can be found at dbroot.com.
Please note that Jeremy is not a participant in SmartAdvisor AMP, is not an employee of SmartAsset and he has been compensated for this article.
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