SEP-IRA, Solo 401(k), or SIMPLE IRA: Choosing the Right Retirement Plan for Your Small Business

Retirement planning is one of the few areas where the tax code is genuinely trying to help you. As a self-employed business owner, you have access to retirement vehicles that allow you to contribute significantly more than a traditional employee—and, in many cases, deduct contributions within IRS limits. The three most common options for small business owners are the SEP-IRA, the Solo 401(k), and the SIMPLE IRA. Each one fits a different situation.

SEP-IRA (Simplified Employee Pension)

The SEP-IRA is the simplest to set up and maintain. Contributions are employer-only—there's no employee contribution component. You can contribute up to 25% of net self-employment income (after the deductible portion of self-employment tax), up to the IRS annual limit. The deadline to contribute is your tax return due date including extensions, which means you can establish a SEP-IRA after the year ends and still get a deduction for that prior year.

The main drawback: if you have employees, you're required to contribute the same percentage for eligible employees that you contribute for yourself. This makes the SEP-IRA expensive once you have staff.

Solo 401(k)

The Solo 401(k) is for business owners with no employees other than a spouse. It allows contributions as both the employee and the employer—giving you two buckets. Employee contributions can go up to $24,500 for 2026 (plus a $8,000 catch-up if you're 50 or older). Employer contributions are up to 25% of compensation. There is also a higher catch-up of $11,250 for ages 60-63 under SECURE 2.0. The combined limit is substantially higher than a SEP-IRA for moderate income levels.

The Solo 401(k) also permits a Roth option and can allow plan loans—neither of which the SEP-IRA provides. The trade-off is administrative complexity, and if plan assets exceed $250,000, you're required to file Form 5500-EZ annually.

SIMPLE IRA

The SIMPLE IRA is designed for businesses with up to 100 employees. It requires the employer to either match employee contributions up to 3% of compensation or make a flat 2% contribution for all eligible employees regardless of whether they contribute. Employee contribution limit is $17,000 for 2026, with a $4,000 catch-up for those 50 and older, and the higher catch-up for ages 60-63 is $4,000. The SIMPLE IRA must be established by October 1st to be effective for the current year.

Which One Is Right for You?

If you're solo with no employees, the Solo 401(k) typically wins on contribution limits—especially if your income is moderate and you want to shelter as much as possible. If you want simplicity above all else, the SEP-IRA is easier to administer. If you have employees and need to offer them a plan, the SIMPLE IRA is worth modeling against the SEP-IRA depending on headcount and what contribution percentage you're comfortable with.

One Important Note

Contributions to these plans are deductible as a business deduction, not as an itemized deduction. That means you do not need to itemize to benefit. For self-employed owners, deductible contributions generally reduce income tax, but they do not work the same way as ordinary business deductions for self-employment tax purposes. This is a planning decision worth running through the numbers before committing—the right answer depends on your income, employee situation, and how aggressively you want to save.