How a Retirement Contribution Actually Lowers Your Income Tax

If your tax bill came in higher than you expected, you are probably looking for a real way to bring it down next year. Contributing to a self-employed retirement account is one of the most powerful legitimate tools available to you, and the mechanism is straightforward: money you put into a traditional retirement plan is deducted from your income before income tax is calculated. That means the IRS figures your income tax on a smaller number, which lowers both the amount you owe and your effective rate. It works by shrinking the income your tax is based on, not by any loophole.

There is one important limit to understand right away, especially if self-employment tax was the part of your bill that stung the most. A retirement contribution reduces your income tax only. It does not reduce self-employment tax. Self-employment tax, which covers your Social Security and Medicare obligations, is calculated on your business earnings before any retirement deduction is applied. Contributing to a retirement plan will not touch that portion of your bill at all. Knowing this upfront matters so you go in with accurate expectations.

It is also worth being clear about what kind of tax benefit you are actually getting. A traditional retirement account is tax-deferred, not tax-free. The money you contribute, and the growth it earns inside the account, will be taxed when you withdraw it in retirement. The benefit is that you lower your tax rate now, during your working years, and let the money grow without being taxed along the way. You are not escaping tax entirely; you are moving it to a later point in your life when your income and rate may be lower.

Some of these plans also offer a Roth option, where you get no deduction today but qualified withdrawals in retirement are completely tax-free. Whether the traditional or Roth path makes more sense depends on whether you expect to be in a higher or lower tax bracket when you retire. That is a question worth working through with a CPA against your actual numbers.

The One Limit to Understand First: Self-Employment Tax Is Not Affected

If self-employment tax was the part of your bill that hurt the most, this is the single most important thing to understand before you do anything else: contributing to a retirement plan will not reduce it. Not even a little.

Self-employment tax is the mechanism by which self-employed people pay into Social Security and Medicare. When you work for an employer, your employer covers half of that contribution on your behalf. When you work for yourself, you cover both halves. The IRS calculates self-employment tax on your net business earnings, and it does that calculation before any retirement deduction is applied. A retirement contribution simply does not enter that equation.

What a traditional retirement contribution does reduce is your income tax. Those are two separate taxes on your return, calculated in two separate ways. Lowering one does not move the other. If you go into this expecting your retirement contribution to shrink the Social Security and Medicare portion of your bill, you will be disappointed, and you may make a financial commitment based on savings that do not materialize the way you imagined.

The income tax savings are still real and still meaningful. Depending on your tax bracket, every dollar you contribute to a traditional retirement account can reduce your income tax by a significant percentage of that dollar. But it is worth being precise about which part of your bill you are addressing, so your expectations match the actual outcome.

There is one partial offset worth knowing about. You are allowed to deduct half of your self-employment tax when calculating your adjusted gross income. That deduction slightly reduces the income your income tax is figured on, but it does not reduce the self-employment tax itself. It is a separate, automatic adjustment, not something you have to set up. Your tax software or CPA will handle it, but it is useful to understand that it exists and what it does.

The bottom line for this section is simple: go into a retirement plan contribution knowing it is a powerful tool for reducing income tax, and a poor tool for reducing self-employment tax. That clarity will help you evaluate whether the contribution makes sense for your situation and set realistic expectations for how much your total bill will change.

Tax-Deferred vs. Tax-Free: What You Are Really Getting

When people hear that a retirement contribution lowers their taxes, they sometimes picture the money disappearing from the IRS's reach forever. That is not quite right, and understanding the difference matters before you commit to a plan.

A traditional retirement account is tax-deferred. The contribution reduces your taxable income now, so you pay less income tax in the year you make it. The money then grows inside the account without being taxed along the way. But when you withdraw it in retirement, both the original contributions and the growth are taxed as ordinary income at whatever rate applies to you then. You are not eliminating the tax; you are postponing it and, ideally, paying it at a lower rate later in life when your income has dropped.

The practical benefit is real. If you are in a higher bracket now than you expect to be in retirement, deferring tax is genuinely valuable. You get to invest the full pre-tax amount, it compounds over time without annual tax drag, and you eventually pay tax on withdrawals at a lower rate. The gap between your current rate and your future rate is where the advantage lives.

A Roth option works in the opposite direction. You contribute after-tax dollars, so there is no deduction today and no immediate reduction in your tax bill. The trade-off is that qualified withdrawals in retirement are completely tax-free, including all the growth. Several of the plans available to self-employed people offer a Roth option on at least part of the contribution, most notably the Solo 401(k).

Choosing between traditional and Roth comes down to one central question: do you expect to be in a higher tax bracket now or in retirement? If you expect a lower bracket later, traditional deferral generally wins. If you expect a higher bracket later, or if you simply want tax-free income in retirement, Roth may be the better path. A CPA can model both scenarios against your actual income and projected retirement picture, which is a much more reliable way to decide than guessing.

One other point worth keeping in mind: because the money in a traditional account is eventually taxable, large balances can create a meaningful tax obligation in retirement if withdrawals push you into a higher bracket. That is not a reason to avoid these accounts; it is a reason to think about the long-term picture with someone who can run the numbers for your specific situation.

The Main Retirement Plan Options for Self-Employed People

Several plan types are available to self-employed people, and they are not interchangeable. Each one has a different structure, a different contribution ceiling, and a different level of paperwork. The right choice depends on your income, whether you have employees, and how much you can realistically set aside. Here is a plain-language overview of each option. Specific dollar limits are not included because the IRS adjusts them annually; confirm the current-year numbers with your CPA or at IRS.gov before making any decisions.

  • SEP-IRA (Simplified Employee Pension, IRC section 408(k)). This is the simplest plan to set up and maintain. All contributions come from the business side, meaning you contribute as the employer, not as an employee. The contribution is capped at a percentage of your net self-employment earnings, and as a later section explains, that effective rate works out to roughly 20 percent rather than the 25 percent figure you may have seen quoted. There is very little ongoing paperwork, no annual filing requirement for most plan holders, and you can open one and fund it as late as your tax-filing deadline including extensions. It is a strong fit for a solo operator who wants a straightforward, low-maintenance option. The SEP-IRA has traditionally not offered a Roth option, and while recent law under SECURE 2.0 now permits Roth SEP contributions, few custodians currently support them, so in practice the SEP remains a pre-tax vehicle for most people.
  • Solo 401(k) (also called an individual 401(k), IRC section 401(k)). This plan is available only to self-employed people with no employees other than a spouse. It is structured in two pieces: an employee salary-deferral contribution and an employer profit-sharing contribution. Because you are wearing both hats, you can make both types of contributions, which often allows a higher total contribution than a SEP-IRA at the same income level, particularly at low to moderate income where the employee deferral piece makes a meaningful difference. Many Solo 401(k) plans also offer a Roth option on the employee deferral portion. Participants age 50 and older can make additional catch-up contributions on top of the standard employee deferral limit. The trade-off is slightly more paperwork, and once plan assets exceed $250,000 a Form 5500-EZ filing requirement kicks in. On timing, the rules are more nuanced than a simple December 31 cutoff: for an ongoing plan, the employee salary-deferral election generally must be in place by December 31, but employer profit-sharing contributions can typically be made up to the tax-filing deadline including extensions. Under SECURE 2.0, eligible sole proprietors with no employees establishing a Solo 401(k) for the first time may be able to adopt the plan and make retroactive salary deferrals for that first year up to the filing deadline without extensions. A CPA can confirm exactly which rules apply to your situation and tax year.
  • SIMPLE IRA (IRC section 408(p)). This plan has a lower contribution ceiling than either the SEP-IRA or Solo 401(k) at higher income levels, and it generally must be established by October 1 of the year in which you want it to be effective. It is generally a better fit for a small business that has a handful of employees and wants a straightforward way to offer them a retirement benefit. SECURE 2.0 also permits Roth SIMPLE contributions, though provider support remains limited. For a solo high-earning operator, the SIMPLE is usually not the most efficient choice. Participants age 50 and older are eligible for catch-up contributions here as well.
  • Traditional IRA (IRC section 219). Almost anyone with earned income can contribute to a traditional IRA, but the annual contribution ceiling is much smaller than any of the business-focused plans above. The deduction can also be limited or eliminated if you or your spouse is covered by a workplace retirement plan and your income exceeds certain thresholds. For a self-employed person, a traditional IRA is most useful as a supplement to one of the plans above, not as a primary vehicle on its own. Contributions for a given tax year can be made up to the tax-filing deadline, but unlike the business-focused plans, an extension does not push the IRA contribution deadline forward.

Each of these plans is governed by its own set of rules around who can participate, how contributions are calculated, and when the plan must be established versus funded. The descriptions above give you a working map of the landscape, but the specific numbers and deadlines need to be confirmed for the current tax year before you rely on them.

Which Plan Fits Your Situation

Now that you have a working picture of the four main options, the practical question is which one makes sense for you. There is no single right answer, but a few factors point clearly in one direction or another.

If you are a solo operator and want the simplest possible setup, the SEP-IRA is usually the easiest place to start. There is minimal paperwork, no annual filing requirement for most plan holders, and you can open and fund it as late as your tax-filing deadline including extensions. The trade-off is that at lower to moderate income levels, the contribution ceiling can be smaller than what a Solo 401(k) would allow, because the SEP has no employee deferral layer.

If you are a solo operator and want to contribute the most possible, the Solo 401(k) is often the stronger choice, particularly when your net self-employment income falls in a low to moderate range. Because you can make both an employee salary deferral and an employer profit-sharing contribution, you can often reach a higher total than a SEP-IRA would allow at the same income level. The Roth option on the employee deferral piece is also available through many Solo 401(k) plans, and participants age 50 and older can make additional catch-up contributions on top of the standard employee deferral limit. On timing, the employee salary-deferral election for an ongoing plan generally must be in place by December 31, while employer profit-sharing contributions can typically be made up to the tax-filing deadline including extensions. Under SECURE 2.0, eligible sole proprietors with no employees who are establishing a Solo 401(k) for the first time may be able to adopt the plan and make retroactive salary deferrals for that first year up to the filing deadline without extensions. A CPA can confirm exactly which rules apply to your tax year before you commit to anything.

If your business has employees, the Solo 401(k) is off the table entirely. A SEP-IRA or SIMPLE IRA can cover employees, though each comes with its own rules about contribution requirements for eligible staff. Covering employees adds complexity and cost that affects which plan makes financial sense, and a CPA's guidance is especially important in this situation.

If your income is high enough that the standard plan ceilings feel limiting, a defined benefit or cash balance plan may be worth exploring. Those plans are covered in a later section of this article.

A traditional IRA can supplement any of the above, but it is rarely the primary vehicle for a self-employed person because the contribution ceiling is much smaller. If you have already maxed out a SEP-IRA or Solo 401(k) and still want to set aside more, an IRA can add a modest additional amount, subject to the deductibility rules that apply to your situation.

One practical consideration that does not appear in any plan description is cash flow. A retirement contribution locks money away until retirement, and early withdrawals generally trigger taxes plus a penalty. Before committing to a contribution amount, it is worth being honest about whether your household can genuinely spare that cash for the long term. A larger contribution that strains your operating budget is not a good trade even if the tax savings look attractive on paper.

The clearest way to choose is to have a CPA run the numbers for your actual income, your household situation, and the current-year contribution limits. The comparison between a SEP-IRA and a Solo 401(k) at your specific income level is a calculation worth doing precisely rather than estimating, because the difference can be meaningful. That modeling is exactly the kind of work a CPA can do before you commit to anything.

The SEP Percentage, the Net-Earnings Adjustment, and Why 25 Percent Becomes About 20 Percent

If you have looked up the SEP-IRA contribution limit, you have probably seen it described as 25 percent of compensation. For a W-2 employee, that math is straightforward. For a self-employed person, it is a little more involved, and the result is a contribution ceiling that works out to roughly 20 percent of your net self-employment earnings rather than 25 percent. The difference is not a trick or a penalty; it is simply the way the calculation works when you are both the employer and the employee.

Why the SEP limit is described as 25 percent but works out to about 20 percent

Here is the core issue. When you are self-employed, the IRS does not let you base your SEP contribution on your net profit directly. Instead, it requires you to base it on your net profit after subtracting the SEP contribution itself. That creates a circular reference, because the contribution depends on the earnings figure, and the earnings figure depends on the contribution.

The IRS resolves that circularity with a formula. The effective rate you apply to your net self-employment earnings (after the deduction for half of self-employment tax, which reduces the base slightly) works out to approximately 20 percent, not 25 percent. The algebra behind it is clean: divide 25 percent by 1.25, and you get exactly 20 percent.

A simple example illustrates the idea. Suppose your net self-employment earnings after the half-SE-tax deduction are $100,000. A 25 percent contribution on that figure would be $25,000. But the rules require you to subtract the contribution from the base first, so the adjusted base becomes $75,000, and 25 percent of $75,000 is $18,750, not $25,000. The IRS-approved shortcut resolves this by multiplying your net earnings by 20 percent instead, which on a $100,000 base produces a $20,000 contribution. That $20,000 subtracted from $100,000 leaves $80,000, and 25 percent of $80,000 is exactly $20,000. The math checks out.

This does not make the SEP-IRA a poor option. It is still one of the simplest and most effective plans available to a solo operator. But if you went into your planning assuming you could shelter 25 percent of your net profit, the actual number will be lower than you expected. Your CPA can run the precise calculation for your income, because the half-SE-tax deduction and any other adjustments affect the base in ways that are easier to compute accurately with software than by hand.

The Solo 401(k) handles the employer profit-sharing piece with the same underlying math, so the same roughly-20-percent effective rate applies to that portion of a Solo 401(k) contribution as well. The difference is that the Solo 401(k) adds an employee salary-deferral layer on top, which is not subject to this adjustment and can meaningfully increase the total contribution at lower to moderate income levels.

The practical takeaway is that when you are modeling how much a SEP-IRA contribution will reduce your taxable income, you should use the approximately-20-percent figure as your working estimate rather than 25 percent. The gap between those two numbers can be significant at higher income levels, and building your expectations on the higher figure will leave you with a smaller deduction than you planned for. Your CPA can give you the exact number for your situation, which is the figure worth using before you make any financial commitments.

Setup and Funding Deadlines Under SECURE and SECURE 2.0

Deadlines for retirement plans fall into two distinct categories: the deadline to establish the plan and the deadline to fund it. Those two dates are not always the same, and confusing them is one of the more common planning mistakes. The general rules below give you a working picture, but the specific dates shift depending on the plan type, the tax year, and whether you file for an extension. Confirm the current deadlines with your CPA or on IRS.gov before you rely on them for any planning decision.

Setup and funding deadlines: the general rules and why they matter

SEP-IRA. This plan is unusually flexible on timing. In most cases you can open a SEP-IRA and make your contribution for a given tax year as late as your tax-filing deadline for that year, including any extension you have filed. That means a sole proprietor who files for an extension could have until mid-October to both open the account and fund it. This flexibility is one of the reasons the SEP-IRA is a popular choice for people who are doing their tax planning after the calendar year has already ended.

Solo 401(k). The rules here are more layered than a simple December 31 cutoff, and the SECURE Act of 2019 and SECURE 2.0 both changed them in ways that matter for planning.

  • Employer profit-sharing contributions. Since the SECURE Act, you can establish a Solo 401(k) and make employer profit-sharing contributions for a prior tax year as late as your business tax-filing deadline including extensions. You are not required to have the plan in place before December 31 to take the employer contribution deduction for that year.
  • Employee salary deferrals in an ongoing plan. For a plan that is already established, the salary-deferral election generally must be in place by December 31 of the year to which it applies. You cannot go back after year-end and designate a deferral for a year that has already closed under an existing plan.
  • First-year exception under SECURE 2.0. For tax years 2023 and later, an eligible sole proprietor with no employees may adopt a Solo 401(k) after the end of the tax year, provided the plan is adopted by the tax-filing deadline without extensions. Under SECURE 2.0 section 317, that first-year adoption can include retroactive employee salary deferrals for the year being closed out. This is a meaningful exception that keeps options open for a first-time Schedule C filer who is learning about these plans during tax season. A CPA can confirm whether your situation qualifies and which deadline applies to your tax year.

The practical result is that the Solo 401(k) is more accessible after year-end than older guidance suggested, particularly for someone establishing the plan for the first time. That said, the rules are specific enough that you should not rely on this flexibility without confirming it with your CPA before acting.

SIMPLE IRA. This plan has its own calendar. It generally must be established by October 1 of the year in which you want it to be effective, which is earlier than either of the options above. For a business owner who is first learning about these plans in the fall or winter, that deadline may already have passed for the current year. SECURE 2.0 permits Roth SIMPLE contributions, though provider support remains limited in practice.

Traditional IRA. Contributions for a given tax year can be made up to the tax-filing deadline, not including extensions. Unlike the business-focused plans above, an extension does not push the IRA contribution deadline forward.

Congress and the IRS have modified these rules more than once in recent years, and additional changes are possible. Do not rely on any deadline you read in an article, including this one, without verifying that it still applies to the current tax year. Your CPA is the right person to confirm what applies to your situation before you commit to anything.

The most important practical point is that the Solo 401(k) is no longer as deadline-constrained as it once appeared. For employer profit-sharing contributions, the window runs to your filing deadline including extensions. For a first-year adoption with no employees, SECURE 2.0 may extend that window to include retroactive salary deferrals as well. If you want to keep all your options open for the current year, the conversation with your CPA belongs before December 31 rather than after, but missing that date does not necessarily close the door on a Solo 401(k) the way it once did.

How a Retirement Contribution Interacts with the QBI Deduction

If your business qualifies for the qualified business income (QBI) deduction under IRC section 199A, a retirement contribution can have a secondary effect worth understanding before you finalize your planning. The short version is that contributing to a retirement plan can slightly reduce the QBI deduction you would otherwise receive, which means the net tax benefit of the contribution is a little smaller than the contribution amount alone would suggest.

How a retirement contribution affects the QBI deduction

The QBI deduction allows many self-employed people and pass-through business owners to deduct up to 20 percent of their qualified business income from their taxable income. It is a separate deduction from the retirement contribution deduction, and the two interact in a way that is not immediately obvious.

Here is the connection. The QBI deduction is calculated as a percentage of your qualified business income. Under the section 199A regulations, certain deductions attributable to your business reduce the QBI base on which that percentage is applied. The self-employed retirement deduction is one of them, alongside the deduction for one-half of self-employment tax and the self-employed health insurance deduction. The practical result is that a larger retirement contribution produces a slightly smaller QBI deduction, because the base the 20 percent is applied to has shrunk.

A simplified illustration makes this concrete. Suppose your qualified business income before any adjustments is $100,000, and the QBI deduction at 20 percent would be $20,000. If a retirement contribution reduces the QBI base to $80,000, the QBI deduction falls to $16,000. You gained a $20,000 retirement deduction but gave back $4,000 of the QBI deduction, so the net reduction in taxable income is $16,000, not $20,000. The retirement contribution is still worthwhile, but the benefit is not quite as large as looking at the contribution in isolation would suggest.

The interaction is not a reason to avoid making a retirement contribution. In most cases the retirement deduction is still the more valuable of the two, and the reduction in the QBI deduction is a partial offset rather than a full reversal of the benefit. But it is a reason to model the combined effect rather than adding up the two deductions independently.

The QBI deduction also has income thresholds and phase-out rules that can limit or eliminate it depending on your taxable income and the type of business you operate. If your income is above the threshold where the deduction begins to phase out, the interaction with the retirement contribution may work differently than the basic example above. This is exactly the kind of calculation where having a CPA run the numbers for your specific situation matters, because the two deductions affect each other in ways that are difficult to estimate accurately by hand.

The practical takeaway is straightforward: when you are estimating how much a retirement contribution will lower your tax bill, do not simply multiply the contribution by your marginal rate and call it done. If you also claim the QBI deduction, the net benefit will be somewhat smaller than that estimate. Your CPA can calculate both deductions together and give you the actual projected savings, which is the number worth using when you decide how much to contribute.

What About a Defined Benefit or Cash Balance Plan?

For most self-employed people, a SEP-IRA or Solo 401(k) provides more than enough room to make a meaningful dent in their taxable income. But if your net self-employment earnings are consistently high and you want to shelter a significantly larger portion of your income than those plans allow, there is another category worth knowing about: defined benefit plans and their close relative, the cash balance plan.

How defined benefit and cash balance plans work for self-employed people

A traditional defined benefit plan is the kind of pension that promises a specific monthly payment at retirement, calculated using a formula based on your earnings and years of service. When you are self-employed, you are both the employer funding the plan and the participant who will eventually receive the benefit. Because the plan is designed to deliver a defined future payout, an enrolled actuary calculates how much must be contributed each year to fund that promised benefit. Depending on your age, your income, and the benefit you target, the required annual contribution can be substantially higher than what a SEP-IRA or Solo 401(k) would allow. That is the main appeal for a high earner who wants to move a large amount of income into a tax-deferred structure.

A cash balance plan is a hybrid. It is classified as a defined benefit plan from a legal and funding standpoint, but it works more like a defined contribution plan from the participant's perspective: each year your account is credited with a set contribution amount plus a fixed interest credit, so you can see a running balance rather than a future monthly payment formula. Cash balance plans have become increasingly popular among self-employed professionals and small firm owners who want contribution room beyond what a 401(k) provides.

The trade-offs are real. Both plan types require an enrolled actuary to design the plan and calculate the required contribution each year, which adds cost and administrative complexity that a SEP-IRA or Solo 401(k) does not. The contribution is also not fully discretionary the way a SEP contribution is. Once the plan is in place, you are generally committed to funding it at or near the actuarially required level each year, which means the plan needs to fit your expected cash flow over time, not just this year. If your income is variable, locking into that obligation requires careful thought.

These plans are generally worth exploring only when your income is high enough that the contribution limits on a Solo 401(k) or SEP-IRA feel genuinely constraining, and when your income is stable enough to support a multi-year funding commitment. A CPA working alongside an actuary can model whether the additional contribution room justifies the added cost and complexity for your specific situation.

One additional note: some high-income self-employed people pair a cash balance plan with a Solo 401(k), using both simultaneously to maximize total tax-deferred contributions. That combination can be powerful, but it also adds layers of coordination between the two plans that require professional guidance to execute correctly.

If you are just starting to think about self-employed retirement plans, a defined benefit or cash balance plan is probably not where your conversation begins. But if you have already maximized what a SEP-IRA or Solo 401(k) can do and your income still leaves you with a larger tax bill than you would like, it is worth asking your CPA whether the additional contribution room these plans offer makes sense for your situation and your cash flow.

Next Steps: Running the Numbers with Your CPA

The sections above have covered a lot of ground, and it can feel like a lot to hold together at once. The good news is that you do not need to work through all of it on your own. The purpose of understanding the mechanics is to walk into a conversation with your CPA knowing what questions to ask and what decisions are actually in front of you, not to calculate your own contribution ceiling from scratch.

Here is a practical way to approach that conversation.

  1. Bring your most recent Schedule C or a current profit-and-loss statement. Your CPA needs your net self-employment earnings to calculate anything meaningful. An estimate is fine for a preliminary conversation, but the more accurate the number, the more useful the modeling will be.
  2. Ask your CPA to calculate the contribution limit under each plan type that fits your situation. If you have no employees other than a spouse, that likely means comparing a SEP-IRA and a Solo 401(k). If you have a few employees, a SIMPLE IRA may enter the picture. The numbers will differ, and the difference can be significant at certain income levels. If you are 50 or older, ask specifically about catch-up contribution eligibility, since the Solo 401(k) and SIMPLE IRA both permit additional contributions beyond the standard limit for participants in that age range.
  3. Ask for the projected tax savings after accounting for the QBI deduction interaction. As the earlier section explained, the self-employed retirement deduction reduces the qualified business income base under the section 199A regulations, which means a retirement contribution can slightly reduce the QBI deduction you would otherwise receive. The net benefit is still real and often substantial, but the accurate figure is smaller than multiplying the contribution by your marginal rate. Ask for the combined number.
  4. Confirm the setup and funding deadlines for the plan you are considering. The rules here matter and have changed in recent years. For employer profit-sharing contributions to a Solo 401(k), the window runs to your business tax-filing deadline including extensions. For a first-year adoption with no employees, SECURE 2.0 may extend that window to include retroactive salary deferrals as well. Your CPA can tell you exactly where you stand for the current tax year, which is more reliable than any general rule you read in an article.
  5. Talk through whether the contribution fits your cash flow. A retirement contribution is real money set aside, not a bookkeeping entry. It needs to fit what your household can actually spare. Your CPA can help you think through how much to contribute this year versus what to hold in reserve, and whether a smaller contribution now still makes sense or whether it is better to wait until your cash position is stronger.
  6. Ask whether a Solo 401(k) will eventually trigger a Form 5500-EZ filing requirement. Once plan assets cross $250,000, the IRS requires an annual filing. It is not a complicated form, but it is an obligation worth knowing about before you commit to the plan, so it does not catch you off guard later.
  7. If your income is consistently high, ask whether a defined benefit or cash balance plan is worth exploring. Most self-employed people will find that a SEP-IRA or Solo 401(k) provides plenty of room. But if you have already maximized those options and your tax bill is still larger than you would like, the conversation about actuarially determined plans is worth having.

A retirement contribution is one of the strongest legitimate tools available to a self-employed person who wants to lower their income tax bill. It works by deferring tax rather than eliminating it, and it does not touch the self-employment tax portion of your bill, but within those honest limits it can make a meaningful difference in what you owe each year while building a retirement balance at the same time. The right plan, funded at the right level, is a decision worth getting right, and that is exactly the kind of calculation a CPA is positioned to help you with.

If you are in northeastern Pennsylvania and want to talk through your specific situation, the CPAs at this firm are available to help you model the numbers and choose the approach that fits your business and your household. There is no one-size answer, but there is almost certainly an answer that works for you.