SEP IRA vs. Solo 401(k) vs. SIMPLE IRA: Retirement Plan Comparison for Small Business

By Yarik Yarosh, CPA ·September 5, 2026 ·6 min read

Written by Yarik Yarosh, CPA (US & Canada) September 5, 2026 · FL CPA license AC61704 · CPA Ontario

Choosing between a SEP IRA, Solo 401(k), and SIMPLE IRA is one of the most common small business tax planning decisions. Each plan offers tax-deferred (or Roth) contributions that reduce current taxable income, but they differ in contribution limits, employee requirements, administrative burden, and flexibility. The Solo 401(k) generally allows the highest contributions at lower income levels because it includes an employee deferral component ($23,500 for 2025) on top of the employer contribution (25% of compensation). The SEP IRA is simpler to administer but limits contributions to 25% of net self-employment income. The SIMPLE IRA is designed for businesses with employees and has lower limits but requires employer matching or non-elective contributions.

✓Key takeaway

Retirement plan comparison (2025 limits):

Solo 401(k) (Individual 401(k)):

Eligibility: self-employed with no full-time employees (spouse is OK)
Employee deferral: $23,500 (under 50), $31,000 (50-59 or 64+), $34,750 (60-63, SECURE 2.0 super catch-up)
Employer contribution: 25% of W-2 compensation (S-Corp) or 20% of net SE income (sole prop, after SE deduction)
Combined maximum: $70,000 (under 50), $77,500 (50-59 or 64+), $81,250 (60-63)
Roth option: available (employee deferral portion)
Loan provision: available (borrow up to $50,000 or 50% of vested balance)
Administration: Form 5500-EZ required when plan assets exceed $250,000
Deadline to establish: December 31 of the tax year
Deadline to contribute: tax filing deadline (including extensions)

SEP IRA (Simplified Employee Pension):

Eligibility: any self-employed person or business owner
Contribution: employer only (no employee deferral), up to 25% of compensation
Maximum: $70,000 (2025)
Roth option: NOT available (all contributions are pre-tax)
Loan provision: NOT available
Administration: minimal (no annual filing, no Form 5500)
Deadline to establish: tax filing deadline (including extensions)
Deadline to contribute: tax filing deadline (including extensions)
Key limitation: if you have employees, you must contribute the SAME percentage for ALL eligible employees (very expensive for businesses with staff)

SIMPLE IRA (Savings Incentive Match Plan):

Eligibility: businesses with 100 or fewer employees
Employee deferral: $16,500 (under 50), $20,000 (50-59 or 64+), $21,250 (60-63)
Employer contribution: either 3% match or 2% non-elective for ALL eligible employees
Combined maximum: approximately $32,000+ (employee + employer, depending on salary)
Roth option: available starting 2023 (SECURE 2.0)
Loan provision: NOT available
Administration: minimal
Deadline to establish: October 1 of the tax year
Deadline to contribute: tax filing deadline (employer), salary deferral due within 30 days of payroll
Key benefit: lower employer contribution obligation than SEP (3% match vs. 25% for all employees)
Key limitation: the 2-year rule, contributions in the first 2 years of participation face a 25% early withdrawal penalty (instead of the normal 10%)

Quick comparison:

Feature	Solo 401(k)	SEP IRA	SIMPLE IRA
Max contribution (under 50)	$70,000	$70,000	~$32,000
Employee deferral	$23,500	None	$16,500
Employer contribution	25% of comp	25% of comp	3% match or 2% non-elective
Employees allowed	No (except spouse)	Yes (but costly)	Yes (up to 100)
Roth option	Yes	No	Yes
Loan provision	Yes	No	No
Establish deadline	Dec 31	Filing deadline	Oct 1
Form 5500 required	Over $250K assets	No	No

Which plan is best for your situation?

Hypothetical example

Round numbers. Three business owners, each with $120,000 in net self-employment income (sole proprietors). Single filers, all under age 50. No employees.

Scenario 1: Solo 401(k)

Employee deferral: $23,500
Employer contribution: 20% of ($120,000 - $8,478 SE deduction adjustment) = 20% of $111,522 = $22,304
Total contribution: $45,804
Tax savings at 24% bracket: $45,804 x 24% = $10,993
Plus SE tax savings from employer portion: employer contributions to a solo 401(k) reduce the S-Corp’s taxable income but don’t reduce SE income for sole proprietors. For sole proprietors, the employer contribution reduces income tax but not SE tax.
Net tax savings: approximately $10,993 (income tax only on total contribution)

Scenario 2: SEP IRA

Contribution: 20% of ($120,000 - $8,478) = $22,304
Total contribution: $22,304
Tax savings at 24%: $22,304 x 24% = $5,353
Net tax savings: approximately $5,353

Scenario 3: SIMPLE IRA (not applicable, no employees, but for comparison)

Employee deferral: $16,500
Employer non-elective (2% of net SE income): $2,230
Total contribution: $18,730
Tax savings at 24%: $18,730 x 24% = $4,495

Summary:

Plan	Total Contribution	Tax Savings
Solo 401(k)	$45,804	$10,993
SEP IRA	$22,304	$5,353
SIMPLE IRA	$18,730	$4,495

The Solo 401(k) contributes $23,500 MORE than the SEP IRA because of the employee deferral component. This is the defining advantage of the Solo 401(k) for self-employed individuals without employees.

At lower income ($60,000 net SE income):

Plan	Total Contribution	% of Income
Solo 401(k)	$23,500 + $10,304 = $33,804	56%
SEP IRA	$10,304	17%
SIMPLE IRA	$16,500 + $1,060 = $17,560	29%

At lower incomes, the Solo 401(k) advantage is even more dramatic because the $23,500 employee deferral is a flat amount, not a percentage. A sole proprietor earning $60,000 can defer 56% of income with a Solo 401(k) vs. only 17% with a SEP.

When to choose each:

Solo 401(k) when:

Self-employed with no employees (except spouse)
Want the highest possible contribution
Want Roth contributions
Want loan access
Willing to file Form 5500-EZ when assets exceed $250,000

SEP IRA when:

Self-employed with no employees AND want the simplest setup
Don’t need Roth contributions
Don’t need loan access
Late in the year (can establish and fund by the filing deadline, unlike Solo 401(k) which must be established by December 31)
Have employees AND want to contribute a high percentage for yourself (but remember: must contribute the same % for all eligible employees)

SIMPLE IRA when:

Have 5-100 employees
Want lower employer contribution obligation (3% match vs. 25% for all)
Employees want to make their own contributions
Don’t need the higher Solo 401(k) limits

The “too late for Solo 401(k)” scenario: It’s March 2026 and you want to make a retirement contribution for 2025. The Solo 401(k) establishment deadline was December 31, 2025 (missed). The SEP IRA can be established and funded by the filing deadline (April 15, 2026, or October 15 with extension). This is the SEP’s biggest practical advantage: it can be set up retroactively.

Illustrative numbers only, not a real client and not advice for your facts.

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Cite this page

Yarik Yarosh, CPA. "SEP IRA vs. Solo 401(k) vs. SIMPLE IRA: Retirement Plan Comparison for Small Business." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-retirement-plan-comparison-sep-solo401k-simple

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