SEP IRA vs SIMPLE IRA vs Solo 401(k)
A guide by Taxstra Tax & Accounting — CPA-led tax strategy for business owners
2. Contribution Limits & Employer Obligations
How much you can save and what you must contribute
Contribution limits vary significantly. The right plan depends on how much you want to save and whether you have employees who must participate.
SEP IRA (2026)
- Maximum: 25% of net SE income, capped at $69,000
- Example: $200K income = up to $50,000 contribution
- Employer Contribution: Optional, but must be proportional to employees
- Employee Deferral: None (employer-only contributions)
SIMPLE IRA (2026)
- Employee Deferrals: Up to $16,500 (age 50+: $20,500)
- Employer Match/Safe Harbor: 2-3% match or 2% non-elective
- Total for Solo: $16,500 + employer portion
- Mandatory Contribution: Yes; must match or safe harbor
Solo 401(k) (2026)
- Elective Deferrals: Up to $23,500 (age 50+: $30,500)
- Employer Contribution: Up to 25% of SE income
- Total Combined: Up to $69,000 (or $76,500 if age 50+)
- Optional Contribution: Completely flexible
Mandatory Employer Contributions
High-Income Advantage: Solo 401(k)
3. Administrative Complexity & Costs
Setup, ongoing filings, and annual compliance
Complexity and cost scale with the plan type. SEP IRA is the simplest; Solo 401(k) is moderate; SIMPLE IRA adds employee administration.
SEP IRA: Minimal Admin
- Setup: $500–$1,500 (broker paperwork)
- Annual Filing: Form 5498 only (simple)
- Ongoing Cost: $50–$150/year (broker fees)
- Total First Year: $550–$1,650
- Total Annual: $50–$150
SIMPLE IRA: Moderate Admin
- Setup: $1,500–$2,500
- Annual Filing: Form 5498 + potential Form 5500 (if assets over $250K)
- Payroll Integration: Must coordinate with payroll for withholding
- Total First Year: $1,500–$2,500
- Total Annual: $200–$500
Solo 401(k): Moderate to Complex
- Setup: $1,000–$2,000
- Annual Filing: Form 5500-EZ (if assets under $250K) or Form 5500 (if over $250K)
- Investment Options: More flexibility (can hold real estate, etc.)
- Total First Year: $1,000–$2,000
- Total Annual: $300–$800
Defined Benefit Plan: Complex
- Setup: $3,000–$10,000+ (actuarial required)
- Annual Filing: Form 5500 + actuarial certification required
- Consulting: Ongoing actuarial consulting needed
- Total First Year: $5,000–$15,000
- Total Annual: $1,500–$5,000+
Simplicity Winner: SEP IRA
Growth Milestone: Form 5500 Threshold
4. Employee Coverage & Nondiscrimination Rules
How employees are treated across plan types
If you have employees, you must treat them fairly under IRS nondiscrimination rules. Different plans have different employee eligibility and contribution requirements.
Nondiscrimination Rules
SEP IRA: Automatic Nondiscrimination
If you contribute 3% for yourself, you must contribute 3% for all eligible employees. Automatic proportional match prevents discrimination.
Employee Eligibility: Over 21, earned $750+/year, worked 3+ of past 5 years
SIMPLE IRA: Mandatory Employee Contributions
All employees can defer (withhold from wages); you must match. Employees participate immediately.
Employee Eligibility: Any employee age 18+, earning $5,000+/year in current or any 2 of past 5 years
Solo 401(k): No Employees (by Definition)
Solo 401(k) applies only to business owners with no employees (except spouse). If you hire employees, you must switch to SEP IRA or SIMPLE IRA.
Note: Family members or part-time helpers may disqualify you from Solo 401(k); verify with your plan administrator.
Employee Addition Scenario
Full Comparison: SEP IRA vs SIMPLE IRA vs Solo 401(k)
5. When to Choose Each Plan Type
Decision framework for small business owners
Choose SEP IRA If...
- ✓ You are a solo business owner or have 1-5 employees
- ✓ You want simplicity (minimal paperwork and admin)
- ✓ Your income varies year to year (need discretionary contributions)
- ✓ You want to avoid mandatory employee contributions
- ✓ Your net self-employment income is $75K–$250K
Choose SIMPLE IRA If...
- ✓ You have multiple part-time or seasonal employees
- ✓ You want to encourage employee retirement savings
- ✓ Employees earning $5,000+/year need a plan
- ✓ You are willing to make mandatory employer contributions
- ✓ Admin burden is acceptable (payroll integration)
Choose Solo 401(k) If...
- ✓ You are a solo business owner (no employees except spouse)
- ✓ You want maximum contribution flexibility
- ✓ You might need to borrow from your retirement plan
- ✓ Your income is high and stable ($150K+ net SE income)
- ✓ You want investment flexibility (real estate, etc.)
Consider Defined Benefit Plan If...
- ✓ You have very high income (over $300K)
- ✓ You want to maximize tax-deductible contributions
- ✓ You are willing to accept complex administration and costs
- ✓ You have consistent, predictable income
- ✓ Your professional advisors recommend it
6. Real-World Examples & Decision Guide
Practical scenarios to guide your choice
Scenario 1: Solo Freelancer, $120K Income, No Employees
Situation: Freelance consultant, all income from personal services. Wants to save for retirement but keeps costs low.
Recommendation: SEP IRA
- Max Contribution: 25% of SE income = ~$24,000/year
- Setup Cost: $500–$1,500
- Annual Cost: $100–$150 (broker fees)
- Why: Simple, low cost, flexible contributions, no employee obligations
Scenario 2: Small Law Firm, 3 Full-Time Attorneys, $600K Gross Revenue
Situation: Partnership with 3 partners and staff. Want to offer retirement benefits to attract talent.
Recommendation: SEP IRA or Solo 401(k) per Partner
- Structure: Each partner owns a separate solo business entity, sponsors separate Solo 401(k)
- Max per Partner: Up to $69,000/year
- Staff Benefit: Set up separate SIMPLE IRA for staff (mandatory match)
- Why: Partners get maximum savings; staff gets portable SIMPLE IRA
Scenario 3: Tech Startup, Founder + Part-Time Contractors
Situation: Founder wants retirement plan; occasional part-time contractors (not employees). Income volatile.
Recommendation: Solo 401(k) (Roth or Traditional)
- Max Contribution: Up to $69,000/year (2026)
- Flexibility: Adjust contributions based on income (not required)
- Loan Option: Can borrow $25,000 if needed
- Note: Contractors don't receive plan benefits; only founder/employees
Scenario 4: Retail Shop, Owner + 5 Part-Time Employees
Situation: Retail business with seasonal staff. Owner wants retirement savings; staff turnover is high.
Recommendation: SIMPLE IRA
- Owner Max: $16,500 employee deferral + employer match
- Employee Participation: All eligible employees can defer; owner must match 2–3%
- Portability: Employees can take SIMPLE IRA if they leave
- Why: Manages employee turnover well; automatic nondiscrimination
Quick Decision
Frequently Asked Questions
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