Part 13: Retirement Plan Deductions — The Biggest Long-Term Tax Break for Home-Business Owners

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Retirement Plan Deductions — The Biggest Long-Term Tax Break for Home-Business Owners (2025)

One of the most powerful tax strategies for home-business owners is contributing to a retirement plan.
In 2025, self-employed individuals can use SEP IRAs, SIMPLE IRAs, and Solo 401(k)s to
reduce taxable income, grow tax-advantaged savings, and build long-term wealth.
This guide explains contribution limits, eligibility rules, and the best plan options based on your income level.



1️⃣ Why Retirement Plans Matter for Home-Business Owners

Per Chapter 13, retirement plans offer two major benefits:
(1) Lower taxes now via deductible contributions, and
(2) Tax-deferred or tax-free growth for the future.

  • ✔️ Reduce taxable income
  • ✔️ Reduce self-employment tax (for some plans)
  • ✔️ Grow wealth in a tax-advantaged account
  • ✔️ Keep more profit instead of sending it to the IRS

Important: You must have self-employment income to contribute to any business retirement plan.

2️⃣ Overview of Retirement Plan Options

The three most common retirement plans for self-employed individuals are:

  • ✔️ SEP IRA — Employer contributions only, easy to set up
  • ✔️ SIMPLE IRA — Good for businesses with 1–2 employees
  • ✔️ Solo 401(k) — Highest contribution potential

3️⃣ SEP IRA — Simple, Flexible, High Limits

A SEP IRA is ideal for one-person businesses or those with no employees.
Contributions are made by the employer (you), not the employee.

2025 SEP IRA contribution limit:

  • ✔️ Up to 25% of net self-employment earnings
  • ✔️ Maximum contribution: $69,000 (2025 estimate)

SEP IRA advantages:

  • ✔️ Easy to set up
  • ✔️ High contribution limits
  • ✔️ Contributions deductible as a business expense

💡 Example — SEP IRA
Net self-employment income: $120,000
25% of earnings = $30,000 deductible SEP contribution

4️⃣ SIMPLE IRA — Best for Small Teams

A SIMPLE IRA is ideal for businesses with a few employees.
Unlike SEP, both employer and employee can contribute.

2025 SIMPLE IRA limits:

  • ✔️ Employee contribution: up to $16,000
  • ✔️ Age 50+ catch-up: additional $3,500
  • ✔️ Employer match: typically 3% of compensation

SIMPLE IRA benefits:

  • ✔️ Easy to administer
  • ✔️ Good for keeping employees happy
  • ✔️ Employer contributions fully deductible

5️⃣ Solo 401(k) — The Most Powerful Option

The Solo 401(k) is the top choice for home-business owners with no employees
(other than a spouse actively working in the business).

2025 Solo 401(k) contribution limits:

  • ✔️ Employee deferral: up to $23,000
  • ✔️ Age 50+ catch-up: $7,500
  • ✔️ Employer profit-sharing: up to 25% of net earnings
  • ✔️ Combined max: $69,000 (or $76,500 age 50+)

Unique benefits:

  • ✔️ Highest deduction potential of all plans
  • ✔️ Roth 401(k) option may be available
  • ✔️ Can borrow via 401(k) loan (if plan allows)

💡 Example — Solo 401(k)
Net self-employment income: $85,000
Employee deferral: $23,000
Employer share: $21,250
Total contribution: $44,250

6️⃣ Real Contribution Examples

💡 Example 1 — Low Income
Self-employment income: $24,000
✔️ Solo 401(k): contribute up to $23,000
✔️ Nearly 95% of income can be sheltered

💡 Example 2 — High Income
Self-employment income: $180,000
✔️ SEP IRA: up to $45,000
✔️ Solo 401(k): potentially up to $69,000

💡 Example 3 — Hiring Your Spouse
If your spouse legitimately works in the business:
✔️ They can make employee contributions
✔️ You can double the household retirement deductions

7️⃣ IRS Documentation Requirements

Required Records:
• Plan adoption documents (SEP, SIMPLE, 401(k))
• Contribution calculations
• Payroll records (if spouse/employee participates)
• Evidence of timely deposits
• Brokerage or custodian statements

Retirement plan deductions are high-value and high-audit items — keeping full documentation is essential for IRS compliance.

IRS Reference Links

📦 Small Business Essentials — Recommended Tools

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📚 Home Business Tax Deductions Series (2025)

  1. ① Is Your Home Business Really a Business?
  2. ② Do You Have a Profit Motive?
  3. ③ Can You Deduct Your Startup Costs?
  4. ④ Operating Expenses You Can Deduct
  5. ⑤ Section 179 & Bonus Depreciation
  6. ⑥ Home Office Deduction
  7. ⑦ The QBI 20% Deduction
  8. ⑧ Car & Local Travel Expenses
  9. ⑨ Out-of-Town Travel Rules
  10. ⑩ Inventory Rules
  11. ⑪ Employees vs. Contractors
  12. ⑫ Health Insurance & Medical Deductions
  13. ⑬ Retirement Plan Deductions
  14. ⑭ Additional Business Deductions
  15. ⑮ Crypto in Your Business
  16. ⑯ Recordkeeping & Accounting
  17. ⑰ Spouses in Business Together
  18. ⑱ How to Avoid an IRS Audit

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“Part 13: Retirement Plan Deductions — The Biggest Long-Term Tax Break for Home-Business Owners”의 1개의 생각

  1. 핑백: 2025 Form 8829 Example

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