Small Business Retirement Plans: Solo 401(k) vs. SEP IRA vs. SIMPLE IRA (2025)

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

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

Retirement plan contributions are the single largest tax deduction available to most small business owners. A sole proprietor earning $120,000 can contribute up to $70,000 (2025) to a Solo 401(k), reducing taxable income by more than half. The tax savings at a 24% bracket: $16,800 in one year, plus the investment grows tax-deferred. But the right plan depends on your situation: a Solo 401(k) works only if you have no employees (other than a spouse), a SEP IRA requires no employee contributions but allows employer-only funding, and a SIMPLE IRA works with employees but has lower limits. Each plan has different contribution limits, administrative requirements, and deadlines.

✓Key takeaway

2025 retirement plan comparison:

Solo 401(k) (best for self-employed with no employees):

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 net self-employment income (20% of net profit after SE tax deduction for sole proprietors)
Combined maximum: $70,000 (under 50), $77,500 (50-59 or 64+), $81,250 (60-63)
Roth option available (employee deferrals only)
Loan provision available (borrow up to 50% of balance, max $50,000)
No annual filing if balance is under $250,000 (Form 5500-EZ required above $250,000)
Deadline: December 31 to establish for the current year (contributions due at filing)
Can’t cover employees other than the owner and spouse

SEP IRA (simplest for employers):

Employer contribution only: 25% of compensation (20% of net SE income for sole props)
Maximum: $70,000 (2025)
No employee deferral component
Must contribute the SAME percentage for all eligible employees (2 of 3 years, age 21+, $750+ in compensation)
No Roth option
No loan provision
No annual filing
Can be established and funded up to the extended filing deadline (October 15 for sole props)
Deadline advantage: can set up a SEP in October 2026 for the 2025 tax year

SIMPLE IRA (best for small employers with employees):

Employee deferral: $16,500 (under 50), $17,850 (50-59 or 64+), $21,250 (60-63)
Employer match: 100% match up to 3% of compensation, OR 2% nonelective contribution for all eligible employees
No maximum employer contribution formula (the 3% match or 2% nonelective is the limit)
All eligible employees must be offered the plan (earned $5,000 in any 2 prior years AND expect $5,000 this year)
Early withdrawal penalty: 25% if within first 2 years (vs. 10% for other plans)
No Roth option (SECURE 2.0 added this effective 2024, but adoption is slow)
No loan provision
Must be established by October 1 of the year (not retroactive like SEP)

Traditional IRA and Roth IRA (baseline, not employer plans):

Traditional IRA: $7,000 ($8,000 if 50+); deduction phases out with employer plan participation
Roth IRA: $7,000 ($8,000 if 50+); income limits ($161,000 MAGI single, $240,000 MFJ)
These are PERSONAL contributions, not business deductions
Can be used IN ADDITION to employer plans

Defined Benefit Plan (for high earners wanting maximum contributions):

Contribution based on actuarial calculations (age, salary, retirement age)
Can contribute $280,000+ per year for older business owners
Complex and expensive to administer ($2,000-$5,000/year in administration)
Best for: professionals over 50 earning $300,000+ who want to defer maximum income
Can be combined with a 401(k) for even higher contributions

Which retirement plan saves the most tax?

Hypothetical example

Round numbers. A 45-year-old sole proprietor, single filer, $150,000 net business profit. No employees.

Option 1: Solo 401(k)

Employee deferral: $23,500 Employer contribution: 20% of ($150,000 - $10,598 SE tax deduction) = 20% x $139,402 = $27,880 Total contribution: $23,500 + $27,880 = $51,380

Tax savings: $51,380 x 30% (combined federal/state) = $15,414

Option 2: SEP IRA

Employer contribution only: 20% of $139,402 = $27,880 Total contribution: $27,880

Tax savings: $27,880 x 30% = $8,364

Option 3: SIMPLE IRA (if the owner had employees)

Employee deferral: $16,500 Employer match: 3% of $150,000 = $4,500 Total contribution: $21,000

Tax savings: $21,000 x 30% = $6,300

Comparison:

Plan	Max Contribution	Tax Savings	Setup Deadline
Solo 401(k)	$51,380	$15,414	Dec 31 of tax year
SEP IRA	$27,880	$8,364	Filing deadline
SIMPLE IRA	$21,000	$6,300	Oct 1 of tax year

The Solo 401(k) wins by $7,050/year in tax savings over the SEP IRA for this income level. The advantage comes entirely from the employee deferral component ($23,500) that the SEP doesn’t offer.

At $70,000 net profit:

Solo 401(k): $23,500 (deferral) + $11,900 (employer) = $35,400
SEP IRA: $11,900 (employer only)
Solo 401(k) advantage: $23,500 x 22% = $5,170

At lower incomes, the deferral component is proportionally more valuable because it doesn’t depend on profit level.

At $300,000 net profit (age 52):

Solo 401(k): $31,000 (deferral + catch-up) + $55,880 (employer, but capped at combined $77,500) = $77,500
SEP IRA: 20% of $277,000 = $55,400
Solo 401(k) advantage: $22,100 x 35% = $7,735

At $300,000 net profit (age 62, SECURE 2.0 super catch-up):

Solo 401(k): $34,750 (deferral + super catch-up) + enough employer to hit $81,250 = $81,250
SEP IRA: $55,400
Solo 401(k) advantage: $25,850 x 35% = $9,048

The age 60-63 super catch-up: SECURE 2.0 created a new catch-up tier for ages 60-63, allowing $11,250 instead of the standard $7,500. This is a narrow 4-year window that adds $3,750 in additional pre-tax savings per year ($1,313/year in tax savings at 35%).

When the SEP IRA wins:

You missed the December 31 Solo 401(k) deadline and need to set up a plan retroactively (SEP can be established up to the filing deadline)
Your profit is high enough that the employer contribution alone hits the maximum ($70,000 requires approximately $350,000 in net SE income)
Simplicity is the priority (SEP has zero administration)

When to add a Defined Benefit plan:

Age	Net Income	DB + 401(k) Contribution	Tax Savings
55	$400,000	~$200,000	~$70,000
60	$400,000	~$280,000	~$98,000
50	$300,000	~$150,000	~$52,500

A Defined Benefit plan costs $2,000-$5,000/year to administer, but the tax savings dwarf the cost for high-earning business owners approaching retirement.

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

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Cite this page

Yarik Yarosh, CPA. "Small Business Retirement Plans: Solo 401(k) vs. SEP IRA vs. SIMPLE IRA (2025)." Blue Cloud CPA, September 5, 2026. https://bluecloudcpa.com/guides/small-business-retirement-plan-options-solo-401k-sep-simple

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