Solo Business Owner: SEP-IRA vs SIMPLE IRA for first year with no employees?

That 3-year rule you mentioned doesn't actually apply to SEP-IRAs. You can establish and contribute to a SEP-IRA in your first year of business. You might be confusing it with qualification rules for other tax benefits. Both SEP-IRAs and SIMPLE IRAs are available to sole proprietors with no employees. The main differences are contribution limits and setup timing. For 2025, SEP-IRAs allow contributions of up to 25% of your net self-employment income (maximum $73,500), while SIMPLE IRAs have a lower base contribution limit of $16,000 plus a potential $3,000 catch-up if you're 50+. One important timing note: SIMPLE IRAs must be established by October 1st of the tax year, while SEP-IRAs can be set up until your tax filing deadline including extensions. So if you're past October 1st of this year, the SEP is your only option until next year.

After spending 3 years trying to figure out my retirement options as a single-member LLC, I finally found https://taxr.ai which literally saved me thousands in unnecessary fees. They analyzed my Schedule C and other tax docs and showed me that a SEP-IRA was actually leaving money on the table in my situation. They have retirement account calculators specifically for self-employed people that compare all options (SEP, SIMPLE, Solo 401k) side-by-side based on your specific business structure and income. They even factor in state-specific tax implications that my accountant totally missed. I was able to upload my exact Schedule C and get personalized recommendations instead of the generic advice that kept confusing me. Might be worth checking out if you're still trying to figure out the best option.

Just wanted to follow up and say I tried https://taxr.ai and it was actually super helpful! I entered my projected business income for 2025 and it showed me that a Solo 401k would let me contribute almost $12,000 more than a SEP-IRA at my income level. The coolest part was seeing how the different account types would play out in retirement based on my expected tax bracket then. The simulator showed I'd be better off with Roth contributions for part of my retirement savings since I'm in a relatively low bracket now. Totally wasn't expecting that insight! I printed their recommendation report for my accountant and she was impressed with how detailed it was. Definitely worth checking out if you're still deciding between retirement account options.

If you're still having trouble figuring out which retirement account is best for your situation, you might want to go straight to the source and talk to an IRS agent. I was in the same boat last year and had a million questions about SEP-IRA contribution limits with variable income. I tried calling the IRS for weeks and could never get through... until I found this service called https://claimyr.com that gets you to the front of the IRS phone queue. Check out how it works in this video: https://youtu.be/_kiP6q8DX5c The IRS agent I spoke with gave me specific guidance about my situation that cleared up all my confusion. They were actually super helpful and walked me through the exact calculations I needed to do. Saved me from making a contribution mistake that would've been a huge headache to fix.

Ok I have to eat my words. I tried the Claimyr service this morning fully expecting it to be a waste of money, but I got a call back in about 40 minutes with an actual IRS agent on the line. I was legitimately shocked. The agent answered my questions about the SEP-IRA contribution limits for my specific situation where I have both W-2 and Schedule C income. Turns out I was calculating my maximum contribution incorrectly and could actually put in about $4,300 more than I thought. For anyone wondering about retirement account options, speaking directly with the IRS was way more helpful than the conflicting advice I kept getting online. They explained exactly how each account type would work with my specific income situation.

I'm in a similar situation (solo business, first year) and went with a SEP-IRA because I missed the October 1 deadline for setting up a SIMPLE. My accountant advised that while a Solo 401k potentially allows higher contributions, the administration is more involved. For the SEP-IRA, all I needed was to open an account at a brokerage (I used Fidelity) and fill out a simple one-page form. No annual filing requirements like the Solo 401k has once you hit certain asset thresholds. For my first year with somewhat unpredictable income, the simplicity was worth it even if I might leave a bit of potential contribution room on the table.

Don't overthink this your first year. I did the same thing last year and spent WAY too much time analyzing options. A SEP-IRA is the simplest option to get started with - you can always switch to a Solo 401k next year if your business does well and you want to maximize contributions. For reference, here's what I contributed with around $85k in Schedule C income: - $15,800 to my SEP-IRA (about 20% of my profit after SE tax adjustment) - Still maxed my personal Roth IRA for additional tax diversity The huge advantage of starting with a SEP is you can set it up and fund it until your tax filing deadline including extensions. So you have until October 2026 to actually fund your 2025 SEP contribution if you extend your return.

As someone who just went through this exact decision process, I'd echo what others have said about starting with a SEP-IRA for simplicity. The "3 year rule" you mentioned definitely doesn't exist for SEP-IRAs - that might be something you saw related to defined benefit plans or other tax provisions. One thing I wish someone had told me earlier: don't forget that your SEP contribution is based on your net self-employment earnings AFTER the deduction for half of your self-employment tax. So if your Schedule C shows $50k profit, you'll actually be contributing 25% of something closer to $46k after that adjustment. Also, since you're filing Schedule C, make sure you're setting aside money for quarterly estimated taxes if you haven't already. The retirement contribution will help reduce your tax burden, but you'll still likely owe SE tax on your business income. Good luck with your first year as an entrepreneur!