Tax planning
Solo 401(k), SEP-IRA, and SIMPLE IRA: Which Retirement Plan Is Right for Your Business?
The three main retirement plans for self-employed business owners compared — contribution limits, who qualifies, deadline rules, and when each one makes sense. With 2025 limits.
Written by Matt Reese, CPA · 7 min read · Published April 2026·Share on LinkedIn
Key Takeaways
- Solo 401(k) has the highest contribution limits: up to $70,000 in 2025 if you're under 50. It's the default choice for most solo operators.
- SEP-IRA is simpler to administer but limited to ~25% of compensation — typically less than Solo 401(k) at the same income.
- SIMPLE IRA is designed for businesses with employees — higher admin cost and mandatory employer contributions make it rarely the right choice for solo operators.
- The Solo 401(k) plan must be established (documents signed) by December 31 of the year you want to contribute — but contributions can be made up to your tax filing deadline.
Why retirement accounts matter more for business owners
A W-2 employee at a company contributing to their 401(k) can shelter up to $23,500 per year (2025). A self-employed business owner can shelter up to $70,000 — nearly three times as much. The difference is the employer contribution.
When you’re self-employed, you are both the employee and the employer. You can make both an employee contribution (up to the standard limit) and an employer contribution (up to 25% of compensation). Together, they can reach $70,000 — or $77,500 if you’re 50 or older.
Every dollar in a pre-tax retirement account is a dollar you don’t pay income tax on this year. At a 30% combined federal and state rate, maxing a Solo 401(k) is worth $21,000 in immediate tax savings.
At $70,000/year in contributions and a 30% effective rate, the tax savings are $21,000/year. That’s before compounding.
The three options side by side
| Plan | 2025 max contribution | Who can use it | Setup deadline | Best for |
|---|---|---|---|---|
| Solo 401(k) | $70,000 ($77,500 if 50+) | Owner-operators with no non-owner employees (spouse OK) | December 31 of contribution year — plan must be established | Solo operators, S-corp owners — highest limit, most flexibility |
| SEP-IRA | ~25% of net earnings, max $70,000 | Any size business including those with employees | Tax filing deadline (including extensions) | Simplicity, or if you have employees you need to include |
| SIMPLE IRA | $16,500 employee deferrals + 2–3% employer match | Businesses with 100 or fewer employees (must have employees) | October 1 for new plans in the current year | Small businesses with employees where traditional 401(k) is too expensive |
Solo 401(k): the default for solo operators
If you’re self-employed with no employees (other than a spouse), the Solo 401(k) almost always produces the largest deduction at a given income level. Here’s how the two contribution types work:
Employee (elective deferral) contribution
You can contribute up to $23,500 in 2025($31,000 if 50+) as the employee — this is a dollar-for-dollar deferral from compensation. For a sole prop, this is funded from net business profit. For an S-corp owner, it’s funded from W-2 wages.
Employer profit-sharing contribution
As the “employer,” you can also contribute up to 25% of compensation. For a sole prop, compensation is net self-employment income after the SE tax deduction. For an S-corp, compensation is W-2 wages.
Combined, the two contributions can reach $70,000 in 2025 (or $77,500 with catch-up at age 50+).
At $100k profit, the sole prop contributes more to their Solo 401(k) than the S-corp owner — because the employer contribution is based on all net self-employment income, not just a salary. But at higher incomes, the S-corp's SE tax savings typically more than offset this difference.
See your maximum contribution
Enter your income and business structure to see the most you can shelter this year.
Roth Solo 401(k) option
SEP-IRA: simplicity over maximum contribution
The SEP-IRA (Simplified Employee Pension) has one contribution rule: up to 25% of net self-employment income, capped at $70,000 in 2025. There’s no separate employee contribution — just the employer side.
The main advantages over a Solo 401(k):
- You can open and fund a SEP-IRA up to your tax filing deadline — even on extension (October 15 for most). Solo 401(k) plans must be established by December 31.
- No plan documents or annual reporting requirements. Setup is a single form.
- Covers employees automatically (the same contribution percentage must apply to all eligible employees).
The main disadvantage:At lower income levels, a Solo 401(k) allows a larger contribution because the employee deferral ($23,500) gives you a head start that SEP-IRA doesn’t. At income below ~$100k, the Solo 401(k) usually wins.
| Income | Solo 401(k) max contribution | SEP-IRA max contribution | Who wins |
|---|---|---|---|
| $50,000 net SE income | ~$23,500 + $9,239 = $32,739 | ~$9,293 (25% × net SE income) | Solo 401(k) by $23,446 |
| $100,000 net SE income | ~$46,734 | ~$18,587 | Solo 401(k) by $28,147 |
| $200,000 net SE income | ~$60,000 | ~$37,174 | Solo 401(k) by $22,826 |
| $282,000+ net SE income | $70,000 (capped) | ~$70,000 (approaches cap) | Equal at the limit |
SIMPLE IRA: the employee plan
The SIMPLE IRA is designed for small businesses that have employees. If you’re a solo operator, you almost certainly don’t need one. The plan requires mandatory employer contributions — either a 2% contribution for all eligible employees or a 3% matching contribution — which makes it more expensive than alternatives for businesses with staff.
The one scenario where SIMPLE IRA makes sense over a traditional 401(k): you have employees and want the lower administrative cost and simpler compliance (no IRS testing requirements, no 5500 filings until plan assets exceed certain thresholds).
Deadlines you can’t miss
Solo 401(k) December 31 establishment deadline
The SEP-IRA has no such constraint — you can open and fund one up to your tax filing deadline. This makes it the backup plan if December passes without a Solo 401(k) in place.
What to do before December 31
If you don’t have a retirement plan in place for your business:
- Decide which plan: Solo 401(k) if you have no employees and want maximum contribution. SEP-IRA if you need simplicity or have employees. Run the numbers with the retirement contribution maximizer.
- Open the account: Fidelity, Schwab, and Vanguard all offer free Solo 401(k) accounts. The setup takes 15–30 minutes online. For a SEP-IRA, any brokerage works.
- Establish the Solo 401(k) before December 31. Don’t miss this. Funding can happen by tax deadline, but the plan must exist by year-end.
- Talk to your CPA: The contribution amount you choose affects your taxable income, QBI deduction, and quarterly estimates. The optimal number takes the full picture into account.
You might also read
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Frequently asked
Questions owners actually ask
- Can I have a Solo 401(k) if I have an S-corp?
- Yes, and this is a common and powerful combination. As an S-corp owner-employee, you make employee contributions (up to $23,500 in 2025) based on your W-2 wages, plus employer contributions (up to 25% of W-2 wages) from the S-corp. The employee contribution can get you to the full limit faster than a sole prop at the same income level.
- Can I contribute to a Solo 401(k) if I have even one employee?
- No. The Solo 401(k) is only available to owner-operators and their spouses — businesses with eligible non-owner employees cannot use it. If you hire your first employee (other than a spouse), you must terminate the Solo 401(k) and transition to a plan that covers employees, like a SIMPLE IRA or traditional 401(k).
- What's the deadline to open a Solo 401(k)?
- The plan must be established — documents signed and in place — by December 31 of the contribution year. You can't open a Solo 401(k) in February for the prior tax year (unlike a SEP-IRA). Once established, employee contributions must be made by December 31, but employer contributions can be made up to your tax filing deadline (including extensions).
- Can I still contribute to a SEP-IRA if I have other retirement accounts?
- Yes — you can have a SEP-IRA and a Roth IRA simultaneously. The SEP-IRA is funded with pre-tax dollars and reduces your taxable income. The Roth IRA is funded with after-tax dollars and grows tax-free. They don't share a contribution limit. Many business owners use both.
- What happens to my Solo 401(k) if I hire an employee later?
- Once you have eligible non-owner employees, you generally must extend the plan to cover them or terminate it. The termination triggers distribution rules. Most owners in this situation convert to a SIMPLE IRA or set up a small-business 401(k) that covers employees. This is one reason to think about your growth trajectory when choosing a plan.
Take the next step
Turn tax questions into a plan. Talk with Matt or see how we work with operating business owners.
Educational content only.This article is for informational purposes and does not constitute tax, legal, or investment advice. Every owner’s facts are different; consult a qualified CPA and advisor before acting. Tax and accounting services are provided through Matt Reese, CPA; investment advisory services are provided through Measured Risk Portfolios, a registered investment adviser. Matt Reese, CPA and Measured Risk Portfolios are separate entities; clients are not required to engage both.