Retirement Contributions (SEP-IRA, Solo 401k) — United States Tax Rules

Reduce your taxable income with pre-tax retirement contributions — SEP-IRA up to 25% of net self-employment income, Solo 401k up to $70,000 in 2025.

Claimable: Fully claimable · Tax authority: IRS (Internal Revenue Service)

IRS (Internal Revenue Service) Rules

• Retirement contributions for self-employed individuals are deducted on Form 1040 Schedule 1 (above-the-line) — NOT on Schedule C. They reduce your AGI but not your Schedule C net profit.
• SEP-IRA (Simplified Employee Pension): Contribute up to 25% of net self-employment income (after SE Tax deduction), or $70,000 (2025), whichever is less. Opening deadline: your tax filing deadline including extensions (Oct 15).
• Solo 401(k) (Individual 401k): Contribution limits — Employee elective deferral: up to $23,500 (2025) plus $7,500 catch-up if age 50+. Employer profit-sharing: up to 25% of net SE income. Total limit: $70,000 (2025).
• SIMPLE IRA: Contribution limit $16,500 (2025) plus $3,500 catch-up. Must be established by October 1 of the applicable year.
• SEP-IRA requires no annual filing; Solo 401k requires Form 5500-EZ when plan assets exceed $250,000.
• Contributions to your SEP-IRA, Solo 401k, or SIMPLE IRA reduce your federal and state income tax but do not reduce your SE Tax (SE Tax is based on net profit from Schedule C, before retirement deductions).
• Establish the plan and make contributions before the applicable deadlines to claim the deduction for that tax year.

Limits

SEP-IRA 2025: lesser of 25% of net SE income or $70,000. Solo 401k 2025: up to $70,000 combined. SIMPLE IRA 2025: $16,500 employee deferral + $3,500 catch-up.

Worked Example

Michelle is a freelance consultant with net self-employment income of $100,000 in 2025. After the SE Tax deduction ($7,065), her adjusted net income is $92,935. Her SEP-IRA limit: $92,935 × 25% = $23,234. She contributes $23,234 to her SEP-IRA, reducing her federal taxable income by $23,234. At a 22% marginal rate, she saves $5,111 in federal income tax.

Record Keeping

• Keep brokerage statements confirming SEP-IRA or Solo 401k contributions and dates
• Retain the plan establishment documents for your Solo 401k or SIMPLE IRA
• File Form 5500-EZ annually if your Solo 401k has plan assets over $250,000
• Keep contribution receipts for the tax year in which you claim the deduction

Frequently Asked Questions

Can I contribute to both a SEP-IRA and a Solo 401k?

Generally no — you cannot contribute to both a SEP-IRA and a Solo 401k for the same self-employment income. Choose one plan type. Most self-employed individuals with high income prefer the Solo 401k because the employee deferral component allows higher total contributions at lower income levels.

What is the deadline to contribute to a SEP-IRA?

You can contribute to a SEP-IRA for the prior tax year up to your tax filing deadline, including extensions — October 15 if you filed for an extension. This means you can contribute to your 2025 SEP-IRA as late as October 15, 2026.