SEP-IRA — The Most Powerful Option for Self-Employed
The SEP-IRA (Simplified Employee Pension) allows self-employed individuals to contribute up to 25% of net self-employment income, with a maximum contribution of $70,000 in 2026. Contributions are fully deductible as an above-the-line deduction, reducing both federal and California taxable income. The SEP-IRA is simple to set up, has no annual filing requirements, and can be funded up to the tax filing deadline (including extensions).
For business owner retirement strategy, see KDA's Business Owners page.
Solo 401(k) — Maximum Flexibility
The Solo 401(k) (also called Individual 401k or Self-Employed 401k) allows contributions as both employee and employer. As an employee, you can contribute up to $23,500 in 2026 ($31,000 if age 50+). As the employer, you can contribute an additional 25% of net self-employment income. Total combined contributions can reach $70,000 ($77,500 if age 50+).
The Solo 401(k) also allows Roth contributions (after-tax, grows tax-free) and loans from the plan. For self-employed individuals with lower net income, the Solo 401(k) often allows larger contributions than a SEP-IRA because of the employee contribution component.
SIMPLE IRA
The SIMPLE IRA is designed for small businesses with employees. Employee contribution limit in 2026: $16,500 ($20,000 if age 50+). Employer must make either a 2% non-elective contribution or a 3% matching contribution. Less commonly used by solo self-employed individuals because the SEP-IRA and Solo 401(k) typically allow larger contributions.
Comparison Table
| Plan | 2026 Max Contribution | Employee Contribution? | Roth Option? | Loan Option? |
|---|---|---|---|---|
| SEP-IRA | $70,000 (25% of net) | No | No | No |
| Solo 401(k) | $70,000 ($77,500 age 50+) | Yes — $23,500 | Yes | Yes |
| SIMPLE IRA | $16,500 ($20,000 age 50+) | Yes | No | No |
| Traditional IRA | $7,000 ($8,000 age 50+) | Yes | No (separate Roth IRA) | No |
California Tax Treatment of Retirement Contributions
California conforms to federal retirement contribution deduction rules for SEP-IRAs, Solo 401(k)s, and SIMPLE IRAs. Contributions reduce both federal and California taxable income. However, California does not tax Social Security benefits — so the interaction between retirement income and Social Security is different in California than in many other states.
Retirement Plans for S Corp Owners
S Corp shareholder-employees can contribute to a 401(k) based on their W-2 wages (not total S Corp income). The employee contribution limit is $23,500 in 2026. The employer (S Corp) can make additional profit-sharing contributions up to 25% of W-2 wages. This is one of the reasons setting a reasonable but not excessively low salary is important for S Corp owners — a higher salary allows larger retirement contributions.
For high-income California business owners, a Defined Benefit Plan (pension plan) can allow contributions of $200,000-$300,000+ per year, dramatically reducing taxable income. These plans are complex to administer but can produce enormous tax savings for owners in their 50s and 60s who want to accelerate retirement savings. KDA designs and implements these plans for California business owners.
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KDA's licensed CPAs and Enrolled Agents work with California business owners every day. Book a free consultation to see exactly how this applies to your situation.
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