Retirement Plans for Self-Employed Individuals: Tax Benefits for You and Your LLC
Retirement planning is a crucial aspect of financial security, especially for self-employed individuals. Unlike traditional employees, self-employed professionals and LLC owners have the flexibility to choose from a variety of retirement plans that not only secure their future but also offer significant tax advantages. This blog explores the best retirement plan options available, focusing on the tax benefits for both the individual and their LLC.
Popular Retirement Plan Options for Self-Employed Individuals
Solo 401(k)
Overview: Designed for self-employed individuals with no employees (except a spouse), this plan allows contributions as both an employee and an employer.
Contribution Limits: For 2025, you can contribute up to $23,500 as an employee, with an additional $7,500 catch-up contribution if you're over 50. Employer contributions can bring the total to $70,000.
Tax Benefits:
Individual: Contributions reduce taxable income now, and earnings grow tax-deferred until withdrawal.
LLC: If your LLC is taxed as a sole proprietorship or partnership, contributions are deducted on your personal return. If taxed as an S or C corporation, contributions made by the LLC are deductible as a business expense46.
SEP IRA (Simplified Employee Pension)
Overview: A flexible and easy-to-set-up plan ideal for businesses with fluctuating income.
Contribution Limits: Up to 25% of net earnings from self-employment or 20% of modified net profit for sole proprietors/LLCs, capped at $70,000 in 2025.
Tax Benefits:
SIMPLE IRA (Savings Incentive Match Plan for Employees)
Overview: A great option if you have employees and want a straightforward retirement plan.
Contribution Limits: For 2025, employee deferrals are capped at $16,500, with a $3,500 catch-up contribution if over 50. Employer matching contributions are required.
Tax Benefits:
Traditional IRA and Roth IRA
Overview: Available to anyone with earned income; Roth IRAs differ by offering tax-free withdrawals in retirement.
Contribution Limits: $6,500 annually in 2025 ($7,500 if over 50).
Tax Benefits:
Individual: Traditional IRA contributions may be tax-deductible depending on income limits. Roth IRA contributions are not deductible but offer tax-free growth and withdrawals.
Tax Benefits Explained
For Individuals
Contributions to traditional retirement plans like Solo 401(k)s or SEP IRAs lower your taxable income in the year they are made. This means you pay less in taxes now while saving for the future.
Earnings within these accounts grow tax-deferred (or tax-free in the case of Roth accounts), allowing your investments to compound without being reduced by annual taxes.
For LLCs
LLCs taxed as sole proprietorships or partnerships allow retirement plan contributions to pass through to the owner's personal tax return. These deductions reduce the owner's taxable income directly7.
LLCs taxed as S or C corporations can deduct employer contributions as a business expense on their corporate tax return. This reduces the overall taxable income of the business while benefiting the owner8.
Choosing the Right Plan
When deciding which retirement plan is best for you and your LLC, consider:
Your current income level and ability to contribute.
Whether you have employees (Solo 401(k) is ideal if you don’t; SIMPLE IRA works well if you do).
Your preference for immediate tax savings (traditional plans) versus long-term tax-free withdrawals (Roth plans).
Administrative complexity—SEP IRAs are simpler to set up and maintain compared to Solo 401(k)s.
Final Thoughts
Retirement planning is not just about securing your future; it’s also a smart way to reduce your current tax burden. Whether you're contributing as an individual or through your LLC, options like Solo 401(k)s and SEP IRAs provide flexibility and significant tax advantages. Consult with a CPA or financial advisor to determine which plan aligns best with your financial goals.
By taking advantage of these plans now, you can build wealth for retirement while optimizing your tax strategy today!
Any and all information included in this article is provided for informational purposes only and is not to be relied upon as a professional opinion. All content does not constitute professional advice and is not guaranteed to be complete, accurate, reliable, current, or error-free. By consuming this content, you accept and agree that following any information or recommendations provided therein and all channels of digital content is at your own risk.