Retirement accounts for people with side income
Side income gives you a chance that a salary alone often does not: you can open your own retirement plan, put more money in than a typical IRA allows, and deduct what you contribute. This guide covers the main options for 2026, how to estimate your limit, and how contributions fit with the set-aside amount you are already saving for taxes.
Why it matters for taxes
Contributions to a traditional (pre-tax) retirement account are deducted from your income, which lowers your federal income tax right now. They do not reduce self-employment tax, which is calculated on your net profit before any retirement contribution. For someone in the 22% bracket, every $1,000 contributed to a SEP-IRA or the pre-tax side of a solo 401(k) lowers federal income tax by about $220, less a little because the contribution also reduces the qualified business income deduction. See the QBI guide for that interaction. In effect, part of the money you would have paid to the IRS goes into your own account instead.
The main options
| Account | 2026 contribution limit | Best for |
|---|---|---|
| Traditional or Roth IRA | $7,500 ($8,600 if age 50 or older) | Simple, low-income side business, or as a supplement |
| SEP-IRA | Up to 20% of net self-employment earnings (25% of pay for employees), maximum $72,000 | Easy setup, larger contributions, no employees |
| Solo 401(k) | $24,500 employee deferral plus employer contribution, maximum $72,000 total, plus catch-up | Highest contributions at lower profit levels |
| SIMPLE IRA | $17,000 employee deferral plus employer match, catch-up allowed | Businesses with employees |
Catch-up contributions are available at age 50 and over. For 401(k)-type plans in 2026, the catch-up is $8,000, and people aged 60 to 63 can contribute a higher $11,250 under rules from the SECURE 2.0 Act. The IRA catch-up is $1,100.
The IRA: a simple starting point
You can contribute to an IRA regardless of whether you have a side business, so long as you have earned income. The 2026 limit is $7,500, or $8,600 if you are 50 or older, across all of your IRAs. A traditional IRA can be deductible, but if you or your spouse is covered by a workplace retirement plan, the deduction phases out at certain income levels. A Roth IRA gives no deduction now, but withdrawals in retirement can be tax free, and eligibility to contribute phases out at higher incomes. The IRA is a good fit when your side profit is small, since it requires no plan paperwork and no ongoing filing.
The SEP-IRA: easy and flexible
A SEP-IRA is a regular IRA that your business sets up, and it takes about as long as opening a brokerage account. Only the employer contributes, and for a self-employed person the limit works out to about 20% of net self-employment earnings, after subtracting half of self-employment tax, up to $72,000 for 2026. You can decide each year how much to contribute, including nothing in a bad year. You can establish and fund a SEP for a tax year up to the due date of that year's return, including extensions. Be aware that if you have employees, you generally must contribute for them at the same percentage.
The solo 401(k): the biggest contribution at small profit levels
A solo 401(k) is open to a business owner with no employees other than a spouse. It has two parts:
- Employee deferral. You can contribute up to $24,500 for 2026, or up to your net earnings from self-employment if lower, plus a catch-up contribution if you are 50 or older. Contributions can be pre-tax or, in many plans, Roth.
- Employer contribution. The business can also contribute up to about 20% of net self-employment earnings after the self-employment tax deduction.
The combined total cannot exceed $72,000 for 2026, not counting catch-up. Because of the deferral part, a solo 401(k) allows someone with a modest profit to contribute a much bigger share of it than a SEP does.
If you also have a 401(k) at your day job: the $24,500 employee deferral limit applies to you across all plans. If you already put $20,000 into your employer's plan, you could contribute only $4,500 more as an employee deferral to the solo plan. The employer contribution in your solo plan is calculated on the business's own earnings and is not reduced by what you defer at your job, so a person with a day-job plan can still make an employer contribution. The total limit rules and any plan-testing details are worth reviewing with your plan provider or a professional, because they differ if the businesses are related.
Worked example
Alex is 38, has a salaried job with a 401(k) and earns $30,000 net profit from a side business in 2026.
| Step | Amount |
|---|---|
| Net profit | $30,000 |
| Self-employment tax ($30,000 × 92.35% × 15.3%) | $4,239 |
| Half of self-employment tax (deductible) | $2,120 |
| Net earnings for plan purposes | $27,880 |
| SEP-IRA contribution at 20% of net earnings | $5,576 |
| Federal income tax saved at 22% | about $1,227 |
A SEP contribution of $5,576 would reduce Alex's federal income tax by roughly $1,200 and leave Alex with $5,576 in a retirement account. If Alex has not used the whole $24,500 deferral limit at the day job, a solo 401(k) could allow more. Alex's self-employment tax does not change.
Deadlines and setup
- IRA. You can contribute for 2026 until the tax filing deadline, April 15, 2027, without extensions.
- SEP-IRA. Set up and funded by the due date of your return, including extensions.
- Solo 401(k). Employee deferrals are normally elected by the end of the year, and employer contributions can be made up to your filing deadline, including extensions. Since the SECURE 2.0 Act, a sole proprietor with no employees who adopts a brand-new plan may be able to make employee contributions for that first plan year up to the filing deadline. Ask your plan provider whether that applies to you.
Many large brokerages offer solo 401(k) and SEP-IRA accounts at no cost. Check fees and investment choices before opening one.
Retirement savings and your cash flow
A retirement contribution is not free money to spend. Treat the money you set aside for taxes and the money you save for retirement as separate buckets. A good habit is to put your tax set-aside in a savings account and decide on retirement contributions after you have a sense of your year-end profit. Our guide to how much to set aside for taxes covers the first bucket, and the tax calendar lists the deadlines for the second. Because retirement plan rules have many details, particularly if you have employees or a high income, a licensed tax professional can help choose the right plan for you.
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Sources
This guide is general information, not tax advice. Tax rules change and individual circumstances differ. Confirm the details for your situation with the IRS or a licensed tax professional.