Retirement accounts for LLC owners
The largest deduction available to a profitable LLC owner is also the one most often left untouched: a retirement contribution. Unlike most write-offs, it does not require spending money on the business — the cash moves into the owner’s own retirement account, reduces taxable income now, and grows tax-deferred for decades. The two workhorse accounts for self-employed owners are the SEP-IRA and the solo 401(k).
This is general information, not tax or investment advice. Contribution limits change every year, so the dollar caps below are framed for 2026 and should be confirmed against current IRS figures. A CPA or financial advisor should sign off on anything material.
Why retirement contributions are the overlooked deduction
A business expense deduction returns only the tax rate on the dollar spent — the dollar itself is gone. A retirement contribution is different. The full amount stays the owner’s money; it simply moves into a tax-advantaged account. The deduction lowers this year’s taxable income, and the balance compounds untaxed until withdrawal. For an owner already saving, routing those savings through a retirement plan converts ordinary saving into a large, legitimate deduction. That dual benefit is why advisors treat it as the first lever to pull once a business is reliably profitable.
The SEP-IRA
A Simplified Employee Pension IRA is the easiest self-employed retirement plan to run. It is funded entirely by employer contributions — for a solo owner, that means contributions the business makes on the owner’s behalf. There is no separate employee deferral.
The contribution limit is up to 25% of compensation, which for a self-employed owner works out to roughly 20% of net self-employment income after the deduction for half of self-employment tax is accounted for. The dollar cap is generous and rises most years. A SEP-IRA has almost no administrative burden: it can be opened at most brokerages, requires no annual government filing, and contributions are flexible from year to year — an owner can contribute heavily in a strong year and skip a lean one.
The solo 401(k)
A solo 401(k) — also called an individual or one-participant 401(k) — is for a business with no employees other than the owner and a spouse. Its advantage is that it allows contributions from two directions.
- Employee elective deferral. The owner, acting as employee, can defer up to the annual 401(k) employee limit (with an extra catch-up amount for those age 50 and older).
- Employer profit-sharing. The business can add a profit-sharing contribution of up to 25% of compensation on top, similar to a SEP-IRA’s formula.
Because the employee deferral is a flat dollar amount rather than a percentage of income, a solo 401(k) frequently allows a larger total contribution at moderate income levels than a SEP-IRA. Two more features set it apart: many providers offer a Roth option on the employee deferral (after-tax in, tax-free growth and withdrawal), and the plan can permit a loan against the balance, which an IRA cannot. The trade-off is more paperwork — once the balance crosses a threshold, an annual information return is required.
Comparing the two
| Feature | SEP-IRA | Solo 401(k) |
|---|---|---|
| Contribution sources | Employer only | Employee deferral + employer profit-share |
| Total at moderate income | Lower | Often higher |
| Roth option | Generally no | Commonly yes |
| Plan loans | No | Often allowed |
| Catch-up (age 50+) | No separate catch-up | Yes, on the deferral |
| Admin burden | Minimal, no annual filing | Higher; annual return past a balance threshold |
| Works with employees | Yes, but must cover eligible staff | No, unless converted to a full 401(k) |
Contribution limits, framed for 2026
Both plans share an overall annual additions ceiling that the IRS sets and indexes for inflation. The practical takeaways for 2026 planning are stable even as the exact dollars move: the solo 401(k) lets an owner reach the cap faster because the employee deferral is added before the 25% employer math; the SEP-IRA relies entirely on that 25%-of-compensation employer figure. For the precise numbers — the employee deferral limit, the catch-up amount, the compensation cap, and the overall additions limit — check the current IRS limits for the year rather than relying on a figure that may be outdated.
A worked example
Consider an LLC owner with $100,000 of net self-employment income deciding between the two plans. With a SEP-IRA, the contribution is capped at roughly 20% of net SE income after the half-SE-tax adjustment — in the neighborhood of $18,000 to $20,000. With a solo 401(k), the same owner can first make the full employee elective deferral (a flat dollar amount, regardless of the 20% formula) and then add an employer profit-sharing contribution on top of it. At this income level the solo 401(k) total commonly lands several thousand dollars higher than the SEP-IRA, because the employee deferral is not bounded by the percentage-of-income math. The gap narrows at very high incomes, where both plans converge on the overall annual additions ceiling. The figures are illustrative; actual amounts depend on the year’s limits and the owner’s exact net income.
Spousal contributions
If a spouse is genuinely employed by the business, both plans can double the household’s sheltered savings. A spouse drawing a salary or share of self-employment income can have their own SEP-IRA contribution made on their behalf, or — in a solo 401(k) that explicitly covers a spouse — make their own employee deferral and receive an employer profit-share. A solo 401(k) remains a one-participant plan when the only employees are the owner and a spouse, so adding a working spouse does not disqualify it. This is one of the few ways a small business can substantially increase total tax-advantaged contributions without hiring outside staff, though the spouse’s role and pay must be legitimate.
Deadlines
Timing differs in a way that matters at filing season. A SEP-IRA can usually be both established and funded up to the business tax-filing deadline, including extensions — making it a useful last-minute deduction for an owner who realizes in spring that the prior year was more profitable than expected. A solo 401(k) generally must be established by the end of the tax year to make an employee deferral for that year, though the employer profit-sharing portion can often be funded later, up to the filing deadline. An owner who wants the deferral for the current year should open the solo 401(k) before December 31, even if the account is funded later.
Withdrawals and the tax bill later
The deduction today is a deferral, not a forgiveness. Traditional SEP-IRA and pre-tax solo 401(k) balances are taxed as ordinary income when withdrawn in retirement, and withdrawals taken before the qualifying age are generally subject to income tax plus an early-withdrawal penalty, with limited exceptions. Required minimum distributions eventually apply to traditional balances. A Roth solo 401(k) reverses the trade: no deduction now, but qualified withdrawals come out tax-free, which can be the better choice for an owner who expects higher tax rates in the future. Choosing between pre-tax and Roth is a forecast about future versus current tax rates, and it is worth discussing with an advisor rather than defaulting to one.
What changes with employees
Both plans are built around a solo owner, and adding staff changes the calculus. A SEP-IRA can continue, but the business must generally make contributions for all eligible employees at the same percentage it uses for the owner — which can become expensive quickly. A solo 401(k) stops qualifying the moment a non-spouse employee becomes eligible; at that point the business typically converts to a conventional 401(k) or moves to a SIMPLE IRA. An owner planning to hire should weigh the future cost of covering employees before settling on a plan today.
Where to open an account
Both account types are widely available, and the choice of provider shapes what features are actually usable. Most major brokerages offer free or low-cost SEP-IRAs with a simple online application and no annual maintenance fee. Solo 401(k) plans vary more: some brokerage-sponsored plans are free but bare-bones, omitting the Roth option or plan loans, while specialized providers offer fuller-featured plans — Roth deferrals, loan provisions, and a wider investment menu — sometimes for a modest annual fee. An owner who specifically wants the Roth or loan features should confirm a given solo 401(k) plan document includes them before opening, because not every provider does. The underlying investments — index funds, target-date funds, or a broader brokerage menu — are chosen by the owner in either case, and low-cost diversified funds are the common starting point.
Combining with other accounts
A business retirement plan does not replace an owner’s personal IRA. An LLC owner can generally still contribute to a traditional or Roth IRA alongside a SEP-IRA or solo 401(k), subject to the IRA’s own income limits and the fact that being covered by a workplace plan can phase out the deductibility of a traditional IRA contribution. The employee deferral limit on a solo 401(k) is also shared across any other 401(k) the owner participates in — someone with a day-job 401(k) and a side-business solo 401(k) has one combined deferral ceiling, not two. Coordinating these accounts is a place where a quick conversation with an advisor prevents an excess-contribution problem.
Choosing between them
For a solo owner who wants maximum contributions with minimal hassle and no plans to hire, the solo 401(k) usually wins — especially with the Roth option, plan loans, and higher totals at moderate income. For an owner who values simplicity, wants the flexibility to fund after year-end, or expects to add staff, the SEP-IRA is the lighter-touch choice. Many owners start with a SEP-IRA for its ease and migrate to a solo 401(k) as profit and the appetite for larger contributions grow. Either way, both deliver the core benefit that makes this the first deduction to consider once a business is profitable: a meaningful reduction in this year’s taxable income paired with decades of tax-advantaged growth on money that stays the owner’s own.
Frequently asked questions
Which is better for an LLC owner, a solo 401(k) or a SEP-IRA?
It depends on income and plans to hire. A solo 401(k) often allows a larger total contribution at moderate income because of the employee deferral, and it offers a Roth option and loans. A SEP-IRA is simpler and can be funded after year-end. An owner expecting to add employees should weigh the cost of covering staff.
How much can an LLC owner contribute to a SEP-IRA?
Up to 25% of compensation, which for a self-employed owner works out to roughly 20% of net self-employment income after the half-of-SE-tax adjustment, subject to an annual dollar cap. The exact cap changes each year, so confirm the current IRS limit for 2026.
Can a single-member LLC open a solo 401(k)?
Yes. A solo 401(k) is designed for a business with no employees other than the owner and a spouse, which fits a typical single-member LLC. It allows both an employee deferral and an employer profit-sharing contribution.
Does a Roth option exist for self-employed retirement plans?
Many solo 401(k) providers offer a Roth option on the employee deferral, meaning contributions go in after tax and qualified withdrawals are tax-free. SEP-IRAs generally do not offer a Roth feature, though IRS rules have been expanding Roth availability — check current guidance.
When is the deadline to set up these accounts?
A SEP-IRA can usually be established and funded up to the tax-filing deadline including extensions. A solo 401(k) generally must be established by the end of the tax year to make an employee deferral for that year, though the employer portion can often be funded later.
What happens to these plans if the LLC hires employees?
A SEP-IRA can continue but generally requires contributions for all eligible employees at the same rate, which raises cost. A solo 401(k) stops qualifying once a non-spouse employee becomes eligible, so the business typically converts to a regular 401(k) or a SIMPLE IRA.
Related guides
- LLC tax deductions
- How is an LLC taxed?
- LLC vs. S-corp