Retirement Plans for Small Business Owners: SEP IRA, Solo 401(k) and SIMPLE IRA Compared
Owning a business means nobody sets up a pension for you. The good news is that in the US, self-employed people and small employers have three plans that are cheap to run and allow far larger tax-advantaged contributions than a personal IRA. Here is how the SEP IRA, Solo 401(k) and SIMPLE IRA compare, and how to pick one.
Key takeaways
- A SEP IRA is the simplest to open and run. The employer contributes a percentage of pay, up to a high cap, and must contribute the same percentage for eligible employees.
- A Solo 401(k) allows the largest contributions at lower incomes, because you contribute both as employee and employer, but it is only for owners with no employees other than a spouse.
- A SIMPLE IRA is built for employers with up to 100 employees who want staff to be able to contribute, at the cost of a mandatory employer match or contribution.
- Limits change every year. The figures here are the IRS limits for 2026 and must be checked against the current year before you contribute.
This guide is about US plans. Other countries have their own arrangements for the self-employed, such as personal pensions and self-invested personal pensions in the UK, or occupational and private pillar schemes in much of Europe, and the rules differ in important ways. If you are outside the US, use this as a model of the questions to ask and check the equivalent plans where you live.
The three plans here all defer tax on contributions and growth until retirement, with Roth versions available for some, and all are far cheaper to set up than a traditional company 401(k). Which one fits depends on three things: whether you have employees, how much you want to contribute and how much administration you are willing to do.
The three plans at a glance
| Feature | SEP IRA | Solo 401(k) | SIMPLE IRA |
|---|---|---|---|
| Who it is for | Any business, including self-employed; works with or without employees | Owners with no employees other than a spouse | Employers with 100 or fewer employees and no other plan |
| Who contributes | Employer only | Owner as employee and as employer | Employee deferrals plus mandatory employer match or contribution |
| 2026 contribution limit | Up to 25% of compensation, max $72,000 | $24,500 employee deferral plus employer contribution, max $72,000 combined (plus catch-ups) | $17,000 employee deferral (plus catch-up) plus employer 3% match or 2% non-elective |
| Catch-up age 50+ | None | $8,000 (higher amount for ages 60 to 63) | $4,000 (higher amount for ages 60 to 63) |
| Roth option | Permitted since 2023 but depends on the provider | Yes, widely offered for employee deferrals | Permitted since 2023 but depends on the provider |
| Employees | Must receive the same percentage as the owner | Not allowed (except spouse) | Employees may contribute; employer must match or contribute for all eligible staff |
| Loans | No | Often allowed by the plan | No |
| Annual filing | None | Form 5500-EZ once assets exceed $250,000 | None |
| Setup deadline | Tax filing deadline including extensions | Generally by year end to make employee deferrals; employer contributions can follow | Generally by October 1 for the current year |
The 2026 figures above come from the IRS annual cost-of-living adjustments. The IRS publishes new limits each autumn for the following year, and plan rules change through legislation such as the SECURE 2.0 Act of 2022, so confirm every number before you act.
SEP IRA: the simplest option
A Simplified Employee Pension is an IRA that the employer funds. You open accounts at a brokerage, decide each year what percentage of compensation to contribute, from zero to 25%, and contribute that same percentage for every eligible employee. There is no annual filing, no testing and almost no paperwork beyond the one-page adoption form.
For a self-employed person without employees, the contribution is based on net self-employment earnings after deducting half of self-employment tax and the contribution itself, which works out to roughly 20% of net earnings rather than 25%. For an owner paid a salary through an S corporation, the 25% applies to W-2 wages.
Worked example
Suppose a freelance consultant has $120,000 of net self-employment income. The maximum SEP contribution is about 20% of net earnings after the self-employment tax adjustment, roughly $22,300. If instead she runs an S corporation and pays herself a $90,000 salary, the SEP maximum is 25% of $90,000, or $22,500. Either way, the contribution is deductible for the business and grows tax-deferred.
SEP IRA strengths
- Can be opened and funded up to the tax filing deadline, including extensions, for the prior year
- No annual IRS filing
- Contributions are flexible year to year
- Works alongside a personal IRA
SEP IRA weaknesses
- No employee deferrals and no catch-up contributions
- With employees, you must contribute the same percentage for them, which gets expensive
- Reaching the maximum requires high compensation, since the limit is a percentage of pay
- Roth availability depends on your provider
Solo 401(k): the biggest contributions at moderate income
A Solo 401(k), also called an individual or one-participant 401(k), is a standard 401(k) plan for a business whose only employees are the owner and possibly a spouse. Its advantage is that you wear two hats. As an employee, you can defer up to $24,500 for 2026, or more if you are 50 or older. As the employer, you can add up to 25% of compensation (about 20% of net self-employment earnings). The combined total is capped at $72,000 for 2026, before catch-up contributions.
Because the employee deferral does not depend on a percentage of pay, the Solo 401(k) lets a moderate earner put away much more than a SEP.
Worked example
Take the same consultant with $120,000 of net self-employment income. With a Solo 401(k), she can defer $24,500 as an employee and add roughly $22,300 as the employer, for a total of about $46,800, more than double the SEP amount. If she is 50 or older, she can add the catch-up on top. If she is 60 to 63, SECURE 2.0 allows a higher catch-up, which was $11,250 for 2025 and is indexed in later years.
Solo 401(k) plans also offer a Roth option for the employee deferral at most providers, which lets you pay tax now and withdraw tax-free in retirement, and many allow loans of up to 50% of the balance or $50,000, whichever is less. The main constraints are that you cannot have eligible employees other than a spouse, and once plan assets pass $250,000 you must file Form 5500-EZ each year. Employee deferrals for a year generally need the plan to exist by December 31, although SECURE 2.0 relaxed this for sole proprietors in some cases; check the current rule with your provider.
Common mistake
Hiring a first employee and forgetting the Solo 401(k) rules. Once a non-spouse employee meets the plan's eligibility conditions, the plan is no longer a one-participant plan and must either cover them, with full 401(k) testing and administration, or be replaced with a SEP or SIMPLE. Review your plan before you hire.
SIMPLE IRA: the plan for small teams
A Savings Incentive Match Plan for Employees is designed for employers with 100 or fewer employees who want to offer staff a way to save without the cost of a full 401(k). Employees can defer up to $17,000 for 2026, with a $4,000 catch-up from age 50 and a higher catch-up for ages 60 to 63. The employer must either match employee contributions dollar for dollar up to 3% of pay, or contribute 2% of pay for every eligible employee whether or not they contribute. SECURE 2.0 also lets employers make additional contributions within limits, and raised the deferral limits for the smallest employers; the details are specific enough that you should confirm them with your provider.
The SIMPLE IRA has no annual filing and little administration, but it comes with two notable rules. Withdrawals within the first two years of participation that are not rolled into another SIMPLE IRA face a 25% early withdrawal penalty instead of the usual 10%. And the plan must generally be the only retirement plan the employer offers.
Worked example
Imagine a design agency with an owner and six staff, with total eligible payroll of $420,000 including the owner's $100,000 salary. With a 3% match, the employer's cost depends on who participates: if four staff and the owner contribute at least 3% of pay, the match costs about 3% of their combined pay. If the owner chooses the 2% non-elective route instead, the cost is 2% of all eligible pay, $8,400, regardless of participation, and every employee gets a contribution. The owner can defer $17,000 and receive her own 3% match of $3,000, for $20,000 in total.
How to choose
- Do you have employees, or expect to within two years? No employees: Solo 401(k) or SEP. Employees now or soon: SIMPLE IRA, SEP (if you are happy to contribute the same percentage for them) or, as the team grows, a regular 401(k).
- How much do you want to contribute? If you want to save more than about 20% of your earnings, the Solo 401(k) is the only one of the three that gets there at moderate income. If you will contribute less than that, a SEP's simplicity may win.
- Do you want a Roth option or loans? The Solo 401(k) offers both reliably. SEP and SIMPLE Roth contributions are allowed under SECURE 2.0 but many providers have been slow to offer them.
- How much administration can you handle? SEP and SIMPLE require almost none. The Solo 401(k) adds a plan document and, eventually, an annual Form 5500-EZ.
- What is your income pattern? Irregular income favors plans with flexible employer contributions, which all three allow to varying degrees. A SEP can even be decided after year end.
Pro tip
You can contribute to a personal traditional or Roth IRA in addition to any of these plans, subject to the IRA limit ($7,500 for 2026) and income rules. For many owners, a Solo 401(k) or SEP for the business plus a Roth IRA personally is a simple, effective combination. Ask a tax advisor about the deduction and income limits that apply to you.
What they cost to run
All three plans are available from major brokerages and many providers charge no setup or annual fee for the plan itself; you pay only the expense ratios of the funds you choose. Some Solo 401(k) providers charge a small annual fee for plan documents and restatements, and plans with special features such as Roth or loans may cost more. SIMPLE IRAs sometimes carry per-participant fees. Compare the total annual cost against the tax saved: for an owner in a 24% federal bracket contributing $40,000, the first-year federal tax deferral alone is $9,600, which dwarfs any plan fee.
Timing and deadlines
Deadlines are where owners most often lose a year of contributions. A SEP can be set up and funded as late as the business's tax filing deadline, including extensions, for the previous year. A SIMPLE IRA generally must be established by October 1 to operate for the current year. A Solo 401(k) traditionally had to exist by December 31 for employee deferrals for that year, and SECURE 2.0 added some flexibility for sole proprietors; employer contributions can be made up to the filing deadline. Rules are specific, so confirm them with your provider before relying on them.
Action checklist
- List your employees, their hours and tenure, and whether you expect to hire in the next two years
- Estimate this year's net self-employment earnings or W-2 salary from the business
- Calculate the maximum contribution under each plan using current IRS limits
- Decide whether Roth contributions or loan access matter to you
- Compare two or three providers on fees and features, and open the plan before the relevant deadline
- Set up automatic monthly contributions so the plan actually gets funded
- Review the plan each year when the IRS publishes new limits and whenever your headcount changes
Frequently asked questions
Can I have both a SEP IRA and a Solo 401(k)?
Technically a business can maintain both, but the combined employer contributions share the same overall limit, so there is rarely a reason to. Most owners pick one. Having a SEP from one business and a 401(k) from unrelated employment is more common and is allowed, with limits applied per plan and per person as the rules specify.
What happens to my Solo 401(k) if I hire someone?
If the employee becomes eligible under the plan's terms, usually after meeting age and service requirements, the plan must cover them and becomes a regular 401(k) with testing and reporting. Many owners switch to a SIMPLE IRA or SEP at that point, or move to a low-cost small-business 401(k) provider.
Are contributions deductible if my business lost money?
Contributions depend on compensation. If a sole proprietor has no net self-employment earnings, there is nothing to base a SEP or 401(k) contribution on for that year. An S corporation owner who still drew a salary can contribute based on that salary. Talk to a tax advisor in a loss year.
I am not in the US. What is the equivalent?
Most countries offer tax-advantaged personal or occupational pensions for the self-employed, such as personal pensions and SIPPs in the UK, the Rürup pension in Germany or superannuation contributions in Australia, each with its own limits and rules. The decision framework is the same: who else must be covered, how much you can contribute, what it costs and what the deadlines are.
Related reading
The bottom line
If you have no employees and want to save aggressively, the Solo 401(k) usually wins. If you want the least paperwork and will contribute a modest percentage, or you need the flexibility to decide after year end, the SEP IRA is hard to beat. If you have a small team and want them to save too, the SIMPLE IRA is the practical choice. Whichever you pick, open it before the deadline, automate the contributions and check the IRS limits every year, because they change.
