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Retirement Plans for Small Business Owners: SEP IRA, SIMPLE IRA or Solo 401(k)
The three retirement plans built for small businesses differ mainly in who can join, who contributes and when they must be set up, and the IRS's 2026 limits make the trade-offs easy to compare side by side.
General information, not legal/tax/financial advice; talk to a licensed professional about your situation.
For an owner with no employees other than a spouse, a solo 401(k) usually allows the largest contributions at moderate income levels, because the owner contributes both as an employee (up to $24,500 in 2026) and as the employer. A SEP IRA is funded by the business alone and can be opened as late as the business's tax filing deadline, including extensions, while a SIMPLE IRA suits a business with employees that wants them to save from their own pay, with a modest required employer contribution.
The three plans side by side (2026 limits)
| Feature | SEP IRA | SIMPLE IRA | Solo 401(k) |
|---|---|---|---|
| Best fit | Owners who want a plan funded only by the business, with or without staff | Businesses with employees, generally 100 or fewer | Owners with no employees other than a spouse |
| Who contributes | Employer only | Employees through pay, plus the employer | The owner as employee and as employer |
| Employee contribution limit | None (employer only) | $17,000; plus $4,000 at age 50 and over, or $5,250 at ages 60 to 63 | $24,500; plus $8,000 at age 50 and over, or $11,250 at ages 60 to 63 |
| Employer contribution | Up to 25% of each eligible employee's pay, capped at $72,000 per person; about 20% of net self-employment earnings for the owner | Required: a dollar-for-dollar match up to 3% of pay, or 2% of pay for every eligible employee | Up to 25% of pay (about 20% of net self-employment earnings for a sole proprietor) |
| Total cap per person | $72,000 | Employee limit plus the employer's 3% or 2% | $72,000, not counting catch-up |
| Deadline to set up | The tax return due date, including extensions | Generally October 1 of the year the plan covers | For a sole proprietor with no employees, by the tax filing deadline without extensions |
How to choose in four questions
- Do you have employees, or expect to hire soon? If not, compare the SEP and solo 401(k); if so, compare the SEP and SIMPLE, since a SEP or SIMPLE must cover eligible employees under IRS rules.
- How much do you want to save? At moderate self-employment income, the solo 401(k)'s employee contribution lets an owner save more than a SEP's roughly 20% of net earnings.
- What time of year is it? After October 1, a new SIMPLE IRA generally has to wait for next year, while a SEP can still be opened for this year until the filing deadline.
- How much paperwork will you tolerate? The IRS notes that a 401(k) can cost more to administer than simpler arrangements, and a solo 401(k) must file Form 5500-EZ once plan assets reach $250,000.
Why it works
Small businesses that offer a plan close a gap their workers feel. In the Bureau of Labor Statistics' March 2026 National Compensation Survey, 55% of private industry workers at establishments with 1 to 49 workers had access to a retirement plan, against 91% at establishments with 500 or more, and an employer with a plan has something larger competitors already offer. The IRS also offsets the cost of starting one: an employer with 50 or fewer employees earning at least $5,000 can claim a credit covering 100% of eligible startup costs, up to $5,000, for three years, plus $500 a year for three years for adding automatic enrollment.
Sources
- Internal Revenue Service. News Release IR-2025-111 on 2026 Retirement Plan Limits. 2025.
- Internal Revenue Service. COLA Increases for Dollar Limitations on Benefits and Contributions.
- Internal Revenue Service. Publication 560, Retirement Plans for Small Business. For 2025 returns.
- Internal Revenue Service. SIMPLE IRA Plan and SIMPLE IRA Contribution Limits.
- Internal Revenue Service. One-Participant 401(k) Plans.
- Internal Revenue Service. Retirement Plans Startup Costs Tax Credit.
- U.S. Bureau of Labor Statistics. Employee Benefits in the United States, March 2026, Table 1: Retirement Benefits. National Compensation Survey.
Related reading: A One-Hour Year-End Review for Small Business Owners · When to Hire a Tax Preparer for Your Small Business, and What to Bring · Bookkeeping for Solo Service Providers and Freelancers
Email hello@osnovaops.com about planning your year-end
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