For small business owners and self-employed individuals, choosing the right retirement plan is one of the most impactful financial decisions you can make. The right plan can help you lower your tax bill, build long-term wealth, and give you flexibility as your income and needs change.

The three most commonly used retirement plans for small business owners are the SIMPLE IRA, SEP IRA, and Solo 401(k). While they may appear similar at first glance, each plan has unique rules, contribution opportunities, deadlines, compliance responsibilities, and ideal use cases.

Below, we break down how each plan works, when it makes sense, and how to choose the best option for your situation.

Understanding the Three Main Plans

SIMPLE IRA — Best for businesses with employees who want an easy plan

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is a straightforward retirement plan for small businesses with 100 or fewer employees. The plan allows employees to save through salary‐deferral contributions, while the employer must make either a matching contribution or a fixed non-elective contribution.

Because employer contributions are required every eligible year, SIMPLE IRAs are best suited for businesses that want to offer a retirement benefit to employees but prefer not to manage a complex plan.

SIMPLE IRAs also allow Roth employee deferrals starting in recent years, which gives employees flexibility to save either pre-tax or after-tax.

SEP IRA — Best for self-employed individuals and businesses with no employees

A SEP IRA (Simplified Employee Pension) is funded entirely by employer contributions, which makes it especially attractive to self-employed individuals. It also appeals to small businesses with no employees, or only family employees, because a business with eligible workers must contribute the same percentage of compensation for all of them.

SEP IRAs are known for being easy to manage and highly flexible. A major benefit is that a SEP can be established and funded after the close of the tax year, as late as the business’s tax filing deadline, including extensions. For someone looking to reduce taxes when preparing their return, this flexibility can make a SEP IRA extremely valuable.

Solo 401(k) — Best for owner-only businesses seeking maximum tax savings

A Solo 401(k) (also called an Individual 401(k)) is designed for business owners with no employees other than a spouse. This plan typically allows the largest potential tax-deductible contribution because it combines both employee elective deferrals and employer contributions.

Like a traditional employer 401(k), Solo 401(k)s can include Roth elective deferrals and even offer participant loans, providing additional flexibility unmatched by SIMPLE or SEP IRAs.

Because of their high contribution potential and plan flexibility, Solo 401(k)s are often the most powerful choice for self-employed individuals who want to maximize retirement funding.

Key Differences in Contributions

All three plans allow meaningful retirement savings, but they differ in how contributions are made and how much an owner can save in a single year.

A SIMPLE IRA lets employees make salary deferrals up to the annual limit. Employers must either match employee contributions up to 3% of compensation or make a 2% nonelective contribution for every eligible employee, regardless of whether the employee contributes.

A SEP IRA allows only employer contributions. The amount contributed must be the same percentage of compensation for all eligible employees. For someone self-employed, the maximum employer contribution amount effectively equals 20% of net self-employment earnings after adjusting for the deductible portion of self-employment tax. For those paid through wages (such as S-corp owners), the employer contribution limit is generally 25% of W-2 compensation.

A Solo 401(k) allows both employee elective deferrals and employer contributions. Employee deferrals can be made up to the annual IRS limit, and employer contributions follow the same rules as a SEP—20% of adjusted net income for sole proprietors and 25% of W-2 wages. Together, the employee and employer contributions can reach the annual maximum limit for Solo 401(k) plans. This structure is what typically enables Solo 401(k) savers to contribute significantly more than they could with a SEP IRA at modest income levels.

Because of this dual structure, Solo 401(k) plans generally produce the highest possible contribution for business owners, especially when income is below about $300,000.

How Income Affects Your Options

Contribution amounts depend heavily on business income.

At relatively moderate income levels, a Solo 401(k) clearly allows the greatest savings because you can first make an employee contribution and then add an employer contribution on top of that.

For example, a freelancer who earns $100,000 may only be able to contribute approximately $20,000 to a SEP IRA. In contrast, that same person could contribute more than $40,000 to a Solo 401(k), effectively doubling the tax-favored savings.

As income increases, the advantage decreases because all plans are eventually limited by the same annual maximum contribution cap. Once the cap is reached, it generally does not matter whether you are using a SEP IRA or Solo 401(k) from a pure contribution-amount perspective.

This means the Solo 401(k) is most beneficial for individuals with moderate incomes who still want to save aggressively.

Choosing Based on Business Structure

Business structure also affects plan choice.

S-corp owners often use a Solo 401(k) instead of a SEP IRA because the SEP contribution is based solely on W-2 compensation. Business profits passed through as distributions are not considered compensation for retirement plan contribution purposes. Because S-corps allow distributions that avoid payroll tax, owners often keep W-2 salary modest. However, this also limits SEP IRA contributions, whereas a Solo 401(k) allows additional employee deferrals regardless of how large distributions may be.

Sole proprietors and partners calculate their maximum contributions differently. Because self-employment income is treated as compensation for retirement planning, the allowable employer contribution percentage is effectively 20% of adjusted net income. This rule applies whether the individual contributes to a SEP or a Solo 401(k) as the employer.

Taken together, a Solo 401(k) offers substantial flexibility across business types.

Eligibility and Employee Considerations

Employee status is a major driver of plan selection.

A SIMPLE IRA can cover businesses with employees, allowing each to make salary deferrals. Because the employer must contribute either through matching or a mandatory nonelective contribution, SIMPLE IRAs work best when a small business wants to offer retirement benefits without the complexity of a full 401(k) plan.

A SEP IRA must provide equal percentage contributions to all eligible employees. If you contribute 20% of your own compensation, you must contribute 20% of every eligible employee’s compensation. Because of this rule, most businesses with non-owner employees avoid SEP IRAs unless they are prepared to make meaningful contributions to workers.

A Solo 401(k) cannot be used if the business has any non-spouse employees who would otherwise be eligible to participate. If a business hires even one non-spouse employee who meets minimal participation thresholds, the business will usually need to terminate the Solo 401(k) and adopt a different plan.

For this reason, Solo 401(k)s are ideal for individuals who do not intend to hire employees in the near future.

Setup, Notice, and Funding Deadlines

Each plan has different timing requirements for establishing and funding contributions.

A SIMPLE IRA must generally be established by October 1 of the year for which contributions will apply. Employers must provide eligible employees with a notice each year during the 60 days before January 1 — typically by early November. This notice explains the contribution formula and provides plan details. Although the notice is not filed with the IRS, businesses must keep proof that employees received it. Employee contributions should be deposited as soon as reasonably possible after payroll, generally within 30 days of month-end, while employer contributions may be funded by the business’s tax filing deadline, including extensions.

A SEP IRA is the most flexible option. It can be established and funded up through the business’s tax filing deadline, including extensions. Because SEPs do not require annual employee notices, and contributions may be discretionary from year to year, they are popular for individuals who want to manage cash flow or make decisions at tax time.

A Solo 401(k) must be formally established by December 31 of the plan year if the business wants to make employee elective deferrals for that year. The actual cash contributions, both employee and employer, can usually be deposited up to the business’s tax filing deadline, including extensions. An important nuance is that the election to defer salary must be made by year-end, even if the deposit is made later.

If plan assets exceed $250,000 at year-end, a Solo 401(k) requires filing Form 5500-EZ. SEP and SIMPLE IRAs are not required to file annual Form 5500 returns.

When Each Plan Makes the Most Sense

A SIMPLE IRA is best for small businesses with employees that want to offer a retirement benefit without high administrative burden. Because employer contributions are required annually, SIMPLE IRAs suit businesses with steady cash flow and an interest in encouraging employee saving.

A SEP IRA is generally best for self-employed individuals with no employees. Its ability to be set up and funded after year-end makes it perfect for last-minute tax planning. It is also valuable when income fluctuates, because contributions are optional; you can contribute more in good years and skip contributions in lean years.

A Solo 401(k) is best for business owners who have no employees and want the ability to contribute as much as possible. The combination of employee deferral and employer contributions allows high annual savings potential, especially at moderate income levels. The plan’s optional Roth features and loan provisions provide additional flexibility.

Advanced Planning Concepts

Three concepts often enter into planning discussions: rollover strategy, Roth conversion, and asset allocation.

A rollover strategy refers to moving retirement assets from one account to another, such as moving a prior employer retirement plan into a new IRA or Solo 401(k). When performed correctly through direct trustee-to-trustee transfer, rollovers are tax-free.

A Roth conversion means transferring funds from a pre-tax IRA or 401(k) into a Roth account. Although you pay income tax on the converted amount, future growth and withdrawals may be tax-free. Roth conversions can be beneficial in years when taxable income is unusually low.

Asset allocation is the balance between stocks, bonds, and other investments in the portfolio. While investment choices are generally beyond a tax advisor’s role, understanding asset allocation helps explain long-term growth projections and risk management.

Conclusion: Which Should You Choose?

If you have no employees and want the highest potential contribution, a Solo 401(k) is typically the strongest choice.

If you are self-employed and want flexibility—including the option to set up a plan at tax time—then a SEP IRA may be ideal.

If you have a small team and want a simple retirement plan with mandatory employer contributions but low administrative burden, a SIMPLE IRA is likely the best fit.

Ultimately, the decision depends on your business structure, income, hiring plans, and savings goals. A qualified tax professional can help you evaluate your options and select a plan that maximizes both long-term savings and current-year tax benefits.

Need help choosing?

At Le CPA Group, we help small business owners:

• Determine the best retirement plan for their structure

• Maximize tax deductions

• Comply with plan rules and deadlines

📩 Schedule a free 15-minute consultation:
tram.le@letaxfirm.com
312-544-9226