Retirement Plan Comparison for Small Business Owners: Solo 401(k), SEP-IRA, SIMPLE IRA, and Defined Benefit

Retirement plan comparison (2025 limits):

Solo 401(k) (best for solo operators or owner + spouse):

• Employee deferral: $23,500 ($31,000 if age 50+; $34,750 if ages 60-63 under SECURE 2.0 super catch-up)
• Employer profit sharing: up to 25% of W-2 compensation (S-Corp) or approximately 20% of net self-employment income (sole proprietor)
• Combined maximum: $70,000 ($77,500 if age 50+; $81,250 if ages 60-63)
• Roth option available (after-tax contributions with tax-free growth)
• Loan provision available (borrow up to $50,000 or 50% of vested balance)
• No employer matching requirement
• Plan must be established by December 31 of the plan year
• Complexity: moderate (requires plan document, annual 5500-EZ if assets exceed $250,000)
• Employee restriction: plan becomes more complex and expensive when adding non-owner employees (it becomes a full 401(k) subject to nondiscrimination testing)

SEP-IRA (simplest high-contribution plan):

• Employer contribution only: up to 25% of W-2 compensation (S-Corp) or approximately 20% of net self-employment income (sole proprietor)
• Maximum: $70,000 (2025)
• No employee deferral component
• No Roth option
• No loan provision
• Can be established and funded as late as the tax filing deadline (including extensions): October 15 for calendar-year filers
• Complexity: very low (no annual filing, no plan document beyond the IRS model form)
• Employee rule: if the business has employees who meet the eligibility requirements (3 of the last 5 years, $750+ in compensation), the employer MUST contribute the SAME PERCENTAGE for eligible employees as for the owner. This can make the SEP-IRA prohibitively expensive for businesses with employees.

SIMPLE IRA (best for businesses with 2-100 employees):

• Employee deferral: $16,500 ($20,000 if age 50+; $21,250 if ages 60-63 under SECURE 2.0; SECURE 2.0 also increases the deferral limit by 10% for employers with 25 or fewer employees in the first two years)
• Employer matching: dollar-for-dollar up to 3% of compensation (or 2% nonelective contribution for all eligible employees)
• Maximum (employee + employer): approximately $20,000-$23,000 depending on age and compensation
• No Roth option (until 2026 under SECURE 2.0)
• No loan provision
• Must be established by October 1 of the plan year (not retroactive like the SEP)
• Complexity: low (simpler than a 401(k), no annual filing)
• Employee rule: all employees earning $5,000+ must be eligible
• 25% early withdrawal penalty in first 2 years (instead of the normal 10%)

Defined benefit plan (for high-income owners over 40):

• Contribution based on the benefit formula (typically the maximum benefit at retirement age, back-calculated using actuarial tables)
• Maximum annual benefit at age 62: $280,000 (2025)
• Annual contribution to fund that benefit: can exceed $200,000/year for owners in their 50s
• Mandatory funding (unlike 401(k)/SEP, the contribution is REQUIRED each year based on the actuary’s calculation)
• Annual actuarial valuation: $1,500-$3,000/year
• Annual Form 5500 filing
• Complexity: high (requires an actuary, annual compliance, and 5-10 year commitment)
• Employee rule: if the business has employees, they must be covered (which adds to the employer’s cost)
• Best for: sole proprietors or S-Corp owners with $300,000+ income, few or no employees, and a desire to shelter large amounts from current income tax