Retirement plans that cut your business tax bill: the 2026 guide
If you work for yourself or own a small business, a retirement plan is one of the biggest tax deductions you control. Here is how each plan works, the 2026 limits, the deadlines, and which one fits you.
Prepared by Prem Tax and Accounting Corp. Last checked against official sources on October 9, 2026.
Why a retirement plan is a tax strategy
- It lowers this year's tax. Pre-tax contributions reduce your taxable income now.
- It grows tax-deferred. You pay tax when you take the money out, not each year on the growth.
- The limits are large. An IRA allows $7,500 for 2026. A business owner can often put away many times that.
- You control the timing. Some plans can be set up and funded after year-end, which is useful for tax planning.
- It does not reduce self-employment tax. That is figured on your profit before the retirement deduction.
Which plan fits you?
| If you are... | Look at | Why |
|---|---|---|
| Self-employed or a one-owner business with no employees (a spouse can work in it) | Solo 401(k) | The highest limits for most incomes, a Roth option, and loans are possible |
| The same, and you want the simplest paperwork | SEP-IRA | One short form, no yearly filing, and you can open and fund it at tax time |
| A business with a few employees that wants low cost and simple | SIMPLE IRA | Employees can save, and you either match up to 3% or give 2% |
| A business with employees that wants bigger savings and flexibility | 401(k), often safe harbor | Higher limits, profit sharing and Roth, and startup tax credits may apply |
| An owner with high, steady income (often 45 or older) who wants to deduct far more than $72,000 | Defined benefit or cash balance plan, often with a 401(k) | The yearly benefit limit is $290,000 and an actuary sets the contribution |
2026 limits at a glance
The plans compared
| Plan | Best for | Who contributes | 2026 limit | Set up by |
|---|---|---|---|---|
| Solo 401(k) | Owner and spouse, no other employees | You as employee, plus the business | $24,500 plus business share, up to $72,000 (plus catch-up) | December 31 (a sole proprietor may adopt a new plan after year-end, by the filing deadline) |
| SEP-IRA | Owners, especially with no employees | The business only | Lesser of 25% of pay or $72,000 (about 20% of net for the self-employed) | Tax return due date, including extensions |
| SIMPLE IRA | 100 or fewer employees | Employees, plus a match or 2% from the business | $17,000 (plus $4,000, or $5,250 at 60 to 63) | January 1 to October 1 |
| 401(k) with employees | Any size | Employees, plus the business | $24,500, up to $72,000 in all | Usually by year-end |
| Defined benefit or cash balance | High, steady income | Mostly the business | Benefit up to $290,000; contribution set by an actuary | Plan before year-end with an actuary |
What it can save: an example
A single-owner business with $120,000 of net profit, owner age 45, in the 24% federal bracket. Estimates only; state tax savings are extra.
| Plan | You could put away | Estimated federal tax saved |
|---|---|---|
| Solo 401(k) (sole proprietor) | $46,804 ($24,500 yourself plus $22,304 from the business) | $11,233 |
| SEP-IRA (sole proprietor) | $22,304 | $5,353 |
| Solo 401(k) (S corporation owner paid $90,000) | $47,000 | $11,280 |
| SEP-IRA (S corporation owner paid $90,000) | $22,500 | $5,400 |
The solo 401(k) usually allows far more than a SEP at the same income because you can defer your own pay as well. Use the contribution calculator with your own numbers.
Deadlines that matter
- SEP-IRA: set up and fund by your tax return due date, including extensions.
- Solo 401(k): normally set up by December 31. A sole proprietor with no employees can adopt a new plan after year-end, by the tax filing deadline without extensions, and still count it for the prior year.
- SIMPLE IRA: set up between January 1 and October 1. The 2026 window has closed; plan now for 2027.
- Defined benefit or cash balance: needs an actuary, so start well before year-end.
Mistakes we see
- Opening a SEP-IRA and then hiring staff: the same percentage must go to every eligible employee.
- Forgetting that the $24,500 employee deferral limit applies across all your plans and jobs combined.
- An S corporation owner who pays a very low salary and then finds the contribution limit is tiny.
- Missing the plan setup date, or putting off a decision until the last week of the year.
- Skipping the yearly filing: a solo 401(k) with $250,000 or more needs Form 5500-EZ.
The guide, page by page
Solo 401(k)
The plan with the highest limits for owners with no employees.
Read →SEP-IRA
Simple, employer-only, and you can fund it at tax time.
Read →SIMPLE IRA
A low-cost plan for businesses with employees.
Read →Defined benefit and cash balance
Deduct far more than $72,000 when income is high and steady.
Read →401(k) with employees
Safe harbor, startup credits, auto-enrollment and Illinois Secure Choice.
Read →Calculator and deadlines
Estimate your contribution and the savings.
Read →Common questions
How much can a self-employed person put into a retirement plan for 2026?
With a solo 401(k), you can defer up to $24,500 of your own pay ($32,500 at 50 or older, $35,750 at ages 60 to 63) and the business can add an employer contribution, for up to $72,000 in total before catch-up. A SEP-IRA allows employer contributions only, up to the lesser of 25% of pay or $72,000 (about 20% of net earnings for a sole proprietor).
Do retirement contributions lower my self-employment tax?
No. Contributions reduce your income tax, but self-employment tax (15.3% up to $184,500 of earnings in 2026) is still figured on your business profit before the retirement deduction.
Can I still open a plan for 2026?
Yes, with some limits on timing. A SEP-IRA can be opened and funded as late as your tax return due date, including extensions. A solo 401(k) is normally set up by December 31, though a sole proprietor with no employees can adopt a new one after year-end by the tax filing deadline. A SIMPLE IRA for 2026 had to be set up by October 1.
Is a Roth option better than pre-tax?
It depends on whether you expect a higher or lower tax rate in retirement and how much you value the deduction now. Many owners use pre-tax contributions to lower this year's tax bill and add Roth money for flexibility. A solo 401(k) can offer both if the plan document allows.
What if I hire employees later?
A solo 401(k) is only for owners with no eligible employees other than a spouse. Once you hire eligible employees, you must include them, or switch to a plan built for employees, such as a SIMPLE IRA or a regular 401(k). Plan this before you hire.
Official sources
- IRS: Retirement plans for self-employed people
- IRS: 2026 retirement plan limits
- IRS Notice 2025-67 (2026 limits)
- IRS Publication 560
Let's talk about your taxes, your business, your plans.
Tell us what you need and we will get back to you quickly. There is no pressure: just a friendly conversation and a clear next step.
4260 Westbrook Dr, Suite 107
Aurora, IL 60504
Monday to Friday, 9:00 am to 5:00 pm, by appointment. Saturday and Sunday by appointment when needed.