Retirement Plans for First-Time Business Owners: SEP-IRA, Solo 401(k), and SIMPLE IRA

Retirement plans are powerful tax deductions that shelter $10,000-$70,000+ of income annually. Choosing between a SEP-IRA, Solo 401(k), or SIMPLE IRA depends on your income level and whether you have employees.

SEP-IRA is the simplest option. You can contribute up to 25% of net self-employment income (after the SE tax deduction), with a maximum of $69,000 for 2024. Setup is minimal -- just a signed form and a brokerage account. Contributions are due by your tax filing deadline including extensions. The downside: if you have employees, you must contribute the same percentage for them.

Solo 401(k) offers higher contribution limits. You make both employee contributions (up to $23,000 for 2024, plus $7,500 catch-up if age 50+) and employer contributions (up to 25% of compensation). Combined, the limit is $69,000 ($76,500 with catch-up). This dual structure lets you shelter more income at lower profit levels than a SEP-IRA. Only available if you have no full-time employees other than your spouse.

SIMPLE IRA works for businesses with employees. Employee contributions up to $16,000 for 2024 ($19,500 if age 50+), with required employer matching of up to 3% or a flat 2% contribution. Lower limits but simpler administration than a full 401(k).

The tradeoff: Larger contributions mean bigger tax deductions now but less cash available for business operations. A CPA models the optimal contribution amount based on your income, tax bracket, and cash flow needs.