Retirement Options for Entrepreneurs, Part 1: IRAs, Solo 401(k)s, and SEP IRAs

A Small Business Owner's Guide to Building Wealth While Saving on Taxes

As a small business owner or entrepreneur, retirement planning often gets pushed to the bottom of the to-do list. Between managing cash flow, serving clients, and running day-to-day operations, saving for the future can feel like something you'll get to "eventually."

But here's the reality: the retirement accounts available to self-employed individuals and small business owners are some of the most powerful tax-saving tools in the entire tax code. The right plan doesn't just build your nest egg — it can significantly reduce your taxable income every single year.

At Insightful Accounting Services, our CPA team works with small business owners right here in Columbia, Maryland to help them choose the right retirement plan, maximize contributions, and stay compliant. This two-part guide breaks down every major option so you can make an informed decision. Part 1 covers the plans built for solo entrepreneurs and owners without employees: the IRA, the Solo 401(k), and the SEP IRA. Part 2 covers the plans designed for businesses with a team, the SIMPLE IRA and the Traditional 401(k), plus a side-by-side comparison to help you choose.

Why Retirement Planning Matters More for Business Owners

Unlike employees who may have access to a workplace 401(k) with automatic enrollment and employer matching, entrepreneurs are on their own. There's no HR department setting up your plan. There's no automatic payroll deduction. And there's no one to blame but yourself if you arrive at retirement underprepared.

The silver lining? Self-employed individuals have access to retirement vehicles with much higher contribution limits than most employees realize — and the flexibility to choose a plan that fits your business structure, income level, and goals.

Let's walk through the first three options.

1. Traditional IRA and Roth IRA — The Starting Point for Every Entrepreneur

What It Is

An Individual Retirement Account (IRA) is the most accessible retirement savings vehicle available — open to virtually anyone with earned income, including self-employed individuals, freelancers, side hustlers, and small business owners. There are two main types: Traditional and Roth, and they differ primarily in when you get the tax benefit.

2026 Contribution Limit: $7,500 per year ($8,600 if you're age 50 or older)

Traditional IRA

Contributions may be tax-deductible depending on your income and whether you (or your spouse) have access to a workplace retirement plan. Your investments grow tax-deferred, and you pay ordinary income taxes when you withdraw in retirement.

Pros:

• Potential for an immediate tax deduction on contributions

• Tax-deferred growth means your investments compound without annual tax drag

• Open to anyone with earned income — no business entity required

• Simple to open and maintain through most banks or brokerage firms

• No employer setup costs or administrative requirements

Cons:

• Low contribution limits — $7,500/year is a ceiling that high-earning business owners will outgrow quickly

• Deductibility phases out at higher income levels if you participate in another retirement plan

• Required Minimum Distributions (RMDs) begin at age 73, requiring mandatory withdrawals whether you need the money or not

• 10% early withdrawal penalty if you take money out before age 59½ (with limited exceptions)

Roth IRA

Contributions are made with after-tax dollars — no deduction now — but qualified withdrawals in retirement are completely tax-free, including all growth.

Pros:

• Tax-free growth and tax-free withdrawals in retirement

• No Required Minimum Distributions during your lifetime

• More flexibility — contributions (not earnings) can be withdrawn penalty-free at any time

• Excellent long-term tool if you expect to be in a higher tax bracket in retirement

Cons:

• No upfront tax deduction

• Income limits apply — in 2026, the ability to contribute directly phases out for single filers between $153,000 and $168,000, and for married filers between $242,000 and $252,000 (though a "backdoor Roth" strategy may be available)

• Same low $7,500 annual contribution limit

Bottom Line on IRAs: An IRA is a great starting point and should be on every entrepreneur's radar, but if your business is generating meaningful income, you'll likely want a plan with higher contribution limits.

2. Solo 401(k) — The Entrepreneur's Power Tool

What It Is

Also called an Individual 401(k) or Self-Employed 401(k), the Solo 401(k) is designed specifically for self-employed individuals and business owners with no employees other than themselves (and a spouse). It mirrors the structure of a traditional employer 401(k) but with dramatically higher contribution potential.

2026 Contribution Limit: Up to $72,000 total ($80,000 if age 50 to 59, and up to $83,250 for those age 60 to 63)

How Contributions Work — Two Buckets

This is what makes the Solo 401(k) uniquely powerful: you contribute in two separate capacities.

As the Employee: You can contribute up to $24,500 in elective deferrals (the same limit as a corporate employee's 401(k)), with an additional $8,000 catch-up contribution if you're 50 to 59, or $11,250 if you're 60 to 63. These contributions can be pre-tax (traditional) or after-tax (Roth), depending on your plan documents.

As the Employer: Your business can also make a profit-sharing contribution of up to 25% of net self-employment income (after deducting half of self-employment taxes). This employer contribution is always pre-tax and tax-deductible.

Combined, these two buckets allow total contributions up to $72,000 in 2026 before catch-up amounts — far exceeding any IRA.

Pros:

• Highest contribution limits of any plan available to a sole proprietor or single-member LLC

• Dual contribution structure (employee + employer) maximizes flexibility

• Roth option available — build a tax-free bucket for retirement

• Loan provisions — you can borrow from your Solo 401(k) (up to 50% of the account balance or $50,000, whichever is less)

• Participant loans and investment flexibility

• Contributions are discretionary — you're not locked in to a fixed amount each year

Cons:

• Only available if you have no employees (other than a spouse) — the moment you hire W-2 employees, you generally can't maintain a Solo 401(k)

• More setup complexity than an IRA — you must establish a plan document with a financial institution or third-party administrator

• IRS Form 5500-EZ required once plan assets exceed $250,000 — this is an annual informational return filed with the IRS. Missing it triggers steep penalties ($250/day, up to $150,000)

• Must be established by December 31 of the tax year (though contribution deadlines extend to your tax filing deadline)

Best For: Sole proprietors, single-member LLCs, freelancers, and independent contractors with high income and no employees who want to maximize retirement savings and minimize taxable income.

3. SEP IRA — Simple, Flexible, and Startup-Friendly

What It Is

The Simplified Employee Pension IRA (SEP IRA) is one of the most popular retirement plans for small business owners because of how easy it is to set up and maintain. It allows only employer contributions — you as the business fund the account, not your employees.

2026 Contribution Limit: Up to 25% of net self-employment income (or W-2 compensation for employees), capped at $72,000, with a compensation cap of $360,000

Pros:

• Incredibly easy to set up — a SEP IRA can be opened and funded up to your tax filing deadline, including extensions. This makes it one of the only plans you can establish retroactively — even in April, before you file your return

• No annual filing requirements — unlike a 401(k), a SEP IRA doesn't require filing Form 5500 with the IRS, regardless of account size

• Accessible for brand-new businesses — a startup generating income in year one can open a SEP IRA with no prior plan history required

• High contribution limit (up to $72,000 in 2026) — competitive with the Solo 401(k) for employer contributions

• Flexible — you decide each year how much to contribute; you're not locked into a minimum

• Can be combined with a traditional IRA contribution

Cons:

• Only employer contributions — you cannot make employee salary-deferral contributions the way you can with a Solo 401(k) or SIMPLE IRA. For lower-income years, this means you may contribute less than a Solo 401(k) would allow

• If you have employees, you must contribute equally — if you contribute 20% of your own compensation, you must contribute 20% of each eligible employee's compensation too. This can make the SEP IRA expensive if you have a team

• No Roth option — all contributions are pre-tax/tax-deferred

• No loan provisions

• Eligibility rules: employees who are at least 21, have worked for you in 3 of the last 5 years, and earned at least $750 must be included

Best For: Sole proprietors, freelancers, and early-stage businesses without employees who want a high-limit, low-maintenance retirement plan with backdating flexibility. Also excellent for small businesses with very few employees where the contribution cost is manageable.

Coming Up in Part 2

If you have, or plan to hire, W-2 employees, the plans above may not fit as neatly. In Part 2, we'll cover the SIMPLE IRA and the Traditional 401(k), the two plans built to include a team, and walk through a side-by-side comparison of all five options to help you land on the right one for your business.

Work With a CPA Who Understands Small Business

Retirement planning and tax strategy go hand in hand. Every dollar you contribute to a pre-tax retirement account reduces your taxable income for the year — which means lower federal and Maryland state income taxes, and potentially lower self-employment taxes depending on the plan structure.