Retirement Plan Comparison for Business Owners: Solo 401(k) vs. SEP-IRA vs. SIMPLE IRA vs. Defined Benefit

Retirement plan contributions are the single most tax-efficient way to reduce taxable income for most business owners. The deduction is above-the-line (reduces AGI), doesn’t reduce self-employment tax for a self-employed owner, and the money grows tax-deferred until withdrawal. For a business owner in the 37% federal bracket plus state taxes, a $70,000 retirement plan contribution can save $30,000 or more in current-year taxes. The challenge is choosing the right plan: each type has different contribution limits, employee coverage requirements, administrative costs, and flexibility. The right plan depends on the owner’s income, age, number of employees, and whether they want to maximize contributions or keep things simple. Under SECURE 2.0, the “super catch-up” provision allows those ages 60-63 to contribute an additional $11,250 (instead of the standard $7,500 catch-up) to a 401(k) plan starting in 2025.

Which retirement plan maximizes your tax savings?

How much can I contribute to each retirement plan type?

The Solo 401(k) generally allows the highest total contribution because it combines an employee deferral (the standard 401(k) limit, plus a catch-up amount for ages 50 and over) with an employer profit-sharing contribution of up to 20% of net self-employment income (the effective rate for a self-employed owner). A SEP IRA allows only the employer contribution (up to 20% of net SE income) with no employee deferral. A SIMPLE IRA has a lower employee deferral ceiling but simpler administration. At $100,000 net profit, a Solo 401(k) typically allows about $42,000 to $43,000 in total contributions (2025 and 2026 deferral limits, before any catch-up), while a SEP IRA caps around $18,600. Contribution limits adjust annually for inflation.

What changes if I hire employees beyond myself and my spouse?

Adding employees changes the plan math significantly. A SEP IRA requires the same contribution percentage for all eligible employees: contributing the effective 20% for yourself means contributing 25% of pay for every eligible employee. A SIMPLE IRA requires either a dollar-for-dollar match up to 3% of compensation or a flat 2% non-elective contribution for everyone. The Solo 401(k) is available only to owner-only businesses (the owner plus spouse); hiring even one common-law employee who meets eligibility thresholds converts it to a standard 401(k) with nondiscrimination testing and higher administration costs ($1,000-$3,000/year). Choose the right structure before your first hire.

What are the catch-up contribution rules for business owners over 50?

Business owners aged 50 and older can make additional catch-up contributions beyond the standard limits for most qualified retirement plans. For 401(k) plans including solo 401(k)s, the catch-up contribution is an additional $7,500 for 2025 on top of the standard $23,500 employee deferral limit. SEP IRAs don’t have catch-up provisions because contributions are employer-only and already allow up to 25% of compensation or $70,000. SIMPLE IRAs permit a $3,500 catch-up for those 50 and older, and starting in 2025, participants aged 60-63 get an enhanced catch-up of $5,000 under the SECURE 2.0 Act.

This guide is general information, not tax advice for your specific situation. Which points apply, and how, depends on your facts.