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

By Yarik Yarosh, CPA ·September 5, 2026 ·Updated September 23, 2026 ·7 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.

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.

Want this checked against your own situation?

Start with a Diagnostic: a CPA licensed in the US and Canada reads your file and tells you in writing what's wrong and how to fix it, three to four business days after you finish the questions. The report is $250. If you hire us for any work after that, you get the $250 back as a discount on that work. Or send us your return or your letter and get a fixed price, free.

Start a Diagnostic →See prices

Get a fixed price, free

Get the next cross-border guide by email

One or two plain-English guides a week on US-Canada tax. No spam, unsubscribe anytime.

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, updated September 23, 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.