SEP IRA vs SIMPLE IRA vs Solo 401(k): Choosing the Right Retirement Plan for Small Business Clients

A self-employed professional with no employees should almost always choose the Solo 401(k) — the combination of employee deferral ($23,500 in 2025 plus catch-up) and employer profit-sharing gets to the $70,000 annual cap faster than a SEP IRA at any income level below $280,000, and adds a Roth option the SEP IRA will never have. The SEP IRA wins on simplicity for employers who already have staff and don't want employee deferrals or annual SIMPLE IRA notices. The SIMPLE IRA earns its place when the business owner wants to let employees save through payroll deduction and share the cost through matching, at a lower employer-contribution commitment than a full 401(k) plan. Each plan has a different establishment deadline and a different contribution timing rule — and those differences are what CPAs are most likely to get wrong under filing-season pressure.

How Each Plan Works: Core Mechanics

SEP IRA

A Simplified Employee Pension (SEP IRA) under IRC §408(k) is funded entirely by employer contributions. The employee makes no salary deferrals. The employer deducts contributions as a business expense and directs them into individual IRAs established for each eligible employee.

Eligible employees are those who are age 21 or older, have worked for the employer in at least 3 of the past 5 years, and received at least $750 in compensation from the employer in 2025 (indexed for inflation under IRC §408(k)(3)(C)). Employers can use less restrictive eligibility criteria but cannot be more restrictive.

Contribution limit: 25% of each eligible employee's W-2 compensation, capped at $70,000 per participant for 2025 (IRS Rev. Proc. 2024-40). For self-employed individuals, the effective rate is 20% of net self-employment income (after the deduction for half of self-employment tax) due to the circular computation under IRC §401(c)(2).

The mandatory uniformity rule is the SEP IRA's principal limitation for employers with staff: the same percentage of compensation must be contributed for every eligible employee. If you contribute 15% of compensation for the owner, you must contribute 15% for every eligible employee. An owner who wants to maximize personal contributions while minimizing employer cost will often find this constraint makes the SEP IRA expensive relative to a SIMPLE IRA or a 401(k) plan.

SIMPLE IRA

A Savings Incentive Match Plan for Employees (SIMPLE IRA) under IRC §408(p) combines employee elective deferrals with mandatory employer contributions. It is available to employers with 100 or fewer employees who received at least $5,000 in compensation in the preceding year. Under SECURE 2.0 §117, employers with 101–500 employees may also use a SIMPLE IRA (with enhanced contribution limits) through 2027.

Employee deferral limits for 2025:

• Base limit: $16,500 (IRS Rev. Proc. 2024-40)
• Age 50–59 and 64+ catch-up: $3,500 additional
• Age 60–63 "super catch-up" under SECURE 2.0 §109: $5,250 additional (effective January 1, 2025)

Employer contribution options: The employer must choose one of two mandatory contribution formulas and apply it uniformly:

1. 3% matching contribution: Match each participating employee's elective deferral dollar-for-dollar up to 3% of compensation. The employer may elect to reduce the match to as low as 1% in no more than 2 years out of any rolling 5-year period (IRC §408(p)(2)(C)(ii)).
2. 2% non-elective contribution: Contribute 2% of compensation for every eligible employee, regardless of whether the employee participates. Eligible employees include anyone who received $5,000 or more in compensation in any 2 prior years and is reasonably expected to receive $5,000 in the current year.

Establishment deadline: A new SIMPLE IRA plan must be established by October 1 of the calendar year in which contributions are first made (IRC §408(p)(4)(A)). A new business formed after October 1 may establish a plan as soon as administratively feasible. An existing business that missed the October 1 deadline cannot open a SIMPLE IRA for the current year.

The 2-year rule: Distributions from a SIMPLE IRA within 2 years of the date the participant first had a contribution made to their SIMPLE IRA on their behalf are subject to a 25% early distribution penalty (rather than the standard 10%) under IRC §72(t)(6). This affects the advice CPAs give clients considering a mid-year plan switch or rollover.

Solo 401(k)

A one-participant 401(k) plan — also called an owner-only 401(k), individual 401(k), or Solo 401(k) — applies standard 401(k) rules under IRC §401(k) to a business with no full-time W-2 employees other than the owner and the owner's spouse. "Full-time" means employees who work 1,000 or more hours per year. Under SECURE 2.0 §125, long-term part-time employees (500+ hours for 2+ years) must be offered deferral eligibility beginning January 1, 2025 — which may force solo plan owners with part-time staff to reconsider their plan structure.

Contribution structure — two separate buckets:

1. Employee elective deferrals (from W-2 wages, S-corp salary, or self-employment income):

   • Base limit: $23,500 in 2025 (IRS Rev. Proc. 2024-40)
   • Age 50–59 and 64+ catch-up: $7,500
   • Age 60–63 "super catch-up" under SECURE 2.0 §109: $11,250 (in lieu of the $7,500 standard catch-up)

2. Employer profit-sharing contribution:

   • S-corp or C-corp owner: 25% of W-2 compensation from the corporation
   • Sole proprietor or LLC (partnership or disregarded entity): 20% of net self-employment income after the SE tax deduction under IRC §401(c)(2)

Total annual additions limit: $70,000 (or $81,250 for ages 60–63 with super catch-up) in 2025 per IRC §415(c).

Roth option: Most individual 401(k) plan documents allow Roth deferrals. Employee deferrals can be designated as Roth (after-tax). The profit-sharing employer contribution is always pre-tax — there is no Roth employer contribution. This Roth availability is the Solo 401(k)'s sharpest advantage over both the SEP IRA and SIMPLE IRA, neither of which offers a Roth election. For clients who anticipate being in a higher bracket at retirement, or who have already done significant Roth IRA conversion planning, the ability to make large Roth deferrals through a solo plan is significant.

Establishment deadline: The plan document must be adopted by December 31 of the tax year for which contributions are first made (per IRS guidance). Unlike the SEP IRA, a Solo 401(k) cannot be retroactively created after year-end. Contributions, however, can be made up to the tax filing deadline including extensions — so a plan established on December 31 can still receive a profit-sharing contribution on October 15 of the following year.

Loan feature: Solo 401(k) plans may include loan provisions, allowing the owner-participant to borrow up to 50% of the vested account balance or $50,000, whichever is less, under IRC §72(p). SEP IRAs and SIMPLE IRAs do not permit loans.

Form 5500-EZ: Plans with assets exceeding $250,000 at year-end must file Form 5500-EZ annually. This is the Solo 401(k)'s primary administrative burden.

Side-by-Side Comparison

Feature	SEP IRA	SIMPLE IRA	Solo 401(k)
IRC authority	§408(k)	§408(p)	§401(k) + §415
Employer size	Any	1–100 (or 1–500 via SECURE 2.0)	No full-time employees (except spouse)
2025 employee deferral	None	$16,500 (+ catch-up)	$23,500 (+ catch-up)
2025 employer contribution	25% of W-2 / 20% of net SE income	3% match or 2% non-elective	25% of W-2 / 20% of net SE income
2025 total contribution limit	$70,000	~$16,500–19,750 employee + employer match	$70,000 (+ catch-up to $81,250 ages 60–63)
Roth option	No	No	Yes (employee deferrals only)
Plan establishment deadline	Tax filing deadline (+ extensions)	October 1	December 31
Contribution deadline	Tax filing deadline (+ extensions)	Deferrals: 30 days after month-end; match: tax filing deadline	Tax filing deadline (+ extensions)
Mandatory employer contribution	Same % for all eligible employees	3% match or 2% non-elective	None
Loan permitted	No	No	Yes (up to 50% / $50,000)
Annual filing requirement	None	None	Form 5500-EZ if >$250K assets
Administrative complexity	Low	Moderate	Moderate–High

When to Choose the SEP IRA

Recommend the SEP IRA when:

• The client is self-employed or a sole proprietor who wants the simplest possible structure with no annual employee notification requirements, no plan documents beyond the IRS model Form 5305-SEP, and a contribution decision that can be made at tax filing time.
• The business has employees and the owner is comfortable contributing the same percentage for staff as for themselves — typically profitable small businesses with stable, relatively low-wage workforces.
• The client has already missed the Solo 401(k) December 31 establishment deadline and wants to shelter income for the current tax year. A SEP IRA can still be opened and funded by the return due date (April 15 or October 15 with extension), making it the plan of choice for CPAs working with clients who arrive in March with no prior plan.
• The business generates variable income year to year. Because the employer decides annually whether and how much to contribute, the SEP IRA has no mandatory contribution other than the uniformity percentage if contributions are made. If the business has a bad year, the employer simply contributes nothing.

SEP IRA is not the right choice when:

• The self-employed owner is under 50 and earns less than approximately $230,000 — at those income levels, the Solo 401(k)'s employee deferral bucket gets to $70,000 total faster.
• The owner wants Roth contributions.
• The owner wants employee participation in plan funding.

When to Choose the SIMPLE IRA

Recommend the SIMPLE IRA when:

• The employer has between 5 and 100 employees and wants a retirement benefit that lets employees participate through payroll deferrals — improving compensation competitiveness without the cost of a full 401(k) plan administration.
• The employer wants to limit their contribution commitment relative to a SEP IRA. Under the 3% match, the employer only contributes when employees contribute; employees who opt out cost the employer nothing.
• The client is comfortable with a mandatory employer contribution formula. The SIMPLE IRA does not allow zero employer contributions in any year — the employer must match or make the non-elective contribution for every year the plan is in effect.
• The business was established during the current year and the owner wants to offer deferrals to employees before year-end (as long as the plan is established by October 1).

SIMPLE IRA is not the right choice when:

• The employer has already missed the October 1 establishment deadline for the current year.
• The employer wants to discriminate in favor of highly compensated employees — SIMPLE IRA uses the same rules for everyone.
• The owner is self-employed with no staff and wants maximum contribution capacity. The SIMPLE IRA's $16,500 employee deferral limit is far below the Solo 401(k)'s $23,500, and there is no profit-sharing component for solo operators.

When to Choose the Solo 401(k)

Recommend the Solo 401(k) when:

• The client is self-employed with no full-time W-2 employees other than a spouse. This is the default recommendation for solo business owners. The two-bucket structure — employee deferral plus employer profit-sharing — allows higher total contributions at lower income levels than the SEP IRA. A sole proprietor earning $100,000 of net SE income can contribute $23,500 in deferrals plus approximately $18,587 in profit-sharing (20% of ~$92,935 net SE income after SE tax deduction) for a total of $42,087. The same earner under a SEP IRA is limited to approximately $18,587.

• The client is over 50, particularly ages 60–63, and wants to maximize pre-retirement sheltering. The super catch-up provision under SECURE 2.0 §109 allows $11,250 in additional deferrals for this age group in 2025. Combined with the base deferral and profit-sharing, the ceiling for ages 60–63 reaches $81,250.

• The client wants Roth deferral flexibility. For a business owner who is coordinating a Roth conversion strategy or building a tax-diversified retirement account base, the Roth deferral option in a Solo 401(k) provides a vehicle unavailable in the SEP IRA.

• The client is an S-corp owner seeking to minimize self-employment and payroll taxes and simultaneously maximize retirement savings. The S-corp structure, with a reasonable W-2 salary and distributions, determines both the deferral amount and the employer profit-sharing base. Optimizing the salary level affects both the payroll tax burden and the total retirement contribution.

• The plan must be established by December 31, but the client came to you before year-end. With a September client, the Solo 401(k) is viable; with a January 15 client for the prior year, it is not — send them to the SEP IRA.

Solo 401(k) is not the right choice when:

• The business has (or is about to have) full-time W-2 employees. The moment a qualifying employee is hired, the plan must either cover them or be terminated. The administrative consequences of inadvertently disqualifying a Solo 401(k) are serious.
• The client missed the December 31 establishment deadline and is now in the new year. A SEP IRA is the correct pivot.
• The owner wants maximum simplicity with no documents to maintain. The Solo 401(k) requires a plan document (typically from a prototype or volume submitter provider), annual contribution tracking by bucket, and Form 5500-EZ once assets exceed $250,000.

Contribution Maximums at Common Income Levels (2025, Ages 45–59)

The table below compares maximum deductible contributions under each plan type for a sole proprietor/single-member LLC, before any catch-up contributions. Solo 401(k) employer contribution uses the 20% SE income calculation; SEP IRA uses the same.

Net SE Income	SEP IRA Max	SIMPLE IRA Max*	Solo 401(k) Max
$50,000	$9,293	$18,293**	$32,793**
$75,000	$13,940	$18,940**	$37,440**
$100,000	$18,587	$19,587**	$42,087**
$150,000	$27,881	$28,881**	$51,381**
$200,000	$37,174	—	$60,674**
$280,000+	$70,000	—	$70,000

*SIMPLE IRA assumes 3% match funded by employer as pass-through deduction; employee also defers $16,500 separately. **Includes $16,500 employee deferral for SIMPLE IRA and Solo 401(k) where applicable.

At income levels below $280,000, the Solo 401(k)'s employee deferral component gives it a substantial advantage over the SEP IRA. The SEP IRA only reaches the same total as the Solo 401(k) at approximately $280,000 of net SE income, where 25% hits the $70,000 cap.

Interaction with SECURE 2.0 Act Changes

Three SECURE 2.0 provisions significantly affect plan selection advice for 2025 and beyond:

Super catch-up contributions (§109): Participants aged 60, 61, 62, or 63 may make catch-up contributions of $11,250 in 2025 to 401(k) plans (including Solo 401(k)) and $5,250 to SIMPLE IRA plans, in lieu of the standard catch-up. This provision does not apply to SEP IRAs — there are no catch-up contributions for SEP IRAs regardless of age.

Roth catch-up requirement (§603, effective 2026): For participants earning more than $145,000 in FICA wages in the prior year, all catch-up contributions to employer plans must be designated as Roth. This will affect Solo 401(k) owners who pay themselves a salary exceeding the threshold.

Long-term part-time employee deferral eligibility (§125): Employees with 500+ hours per year for 2 consecutive years (reduced from 3 years) must be offered deferral eligibility in 401(k) plans beginning January 1, 2025. Solo 401(k) plan owners with part-time staff who work 500+ hours should review whether their workforce structure disqualifies them from maintaining a solo plan.

Year-End Planning Checklist for Retirement Plan Decisions

For clients who have not yet established a plan for the current year, use this decision sequence as part of your year-end tax planning process:

Before December 31:

• Is the client self-employed with no full-time employees? → Open a Solo 401(k) and elect deferral amount by December 31. Profit-sharing contribution can be funded later.
• Does the client have employees and want them to have deferral access? → Establish a SIMPLE IRA (if before October 1) or plan a SIMPLE IRA for next year.
• Does the client have employees and want employer-only contributions? → SEP IRA can wait until filing deadline; no December 31 urgency unless setting up Solo 401(k).

After December 31 but before tax filing deadline:

• Client has no prior plan? → Open SEP IRA. Contribute up to 25% of W-2 / 20% of net SE income by the return due date including extensions (typically October 15 for extended returns).
• Client had a Solo 401(k) established? → Make remaining profit-sharing contributions by the filing deadline.
• Client missed Solo 401(k) setup? → SEP IRA only. Do not attempt to retroactively establish a Solo 401(k).

FAQs

Can I contribute to both a SEP IRA and a Solo 401(k) in the same year?

Yes, technically — if you have two separate businesses, each can maintain its own plan. However, the total employer contribution across all plans for a single individual is still limited to 25% of aggregate compensation or $70,000, whichever is less, under IRC §415(c). The plans are aggregated for purposes of the annual additions limit. Most solo business owners have only one business and will choose one plan type per tax year.

What is the deadline to open a new SEP IRA for the 2025 tax year?

A SEP IRA can be established and funded by the tax return due date for the year, including extensions. For a sole proprietor or single-member LLC filing Schedule C, the deadline is April 15, 2026 (or October 15, 2026 with a timely extension). For an S-corp, it is March 15, 2026 (or September 15, 2026 with extension). Unlike the Solo 401(k), there is no December 31 establishment requirement for the SEP IRA.

Can my S-Corp contribute to a SEP IRA for me as the owner-employee?

Yes. An S-corp can establish a SEP IRA and make contributions for the owner-employee based on W-2 compensation. The contribution — up to 25% of W-2 wages — is a deductible business expense to the corporation and not included in the owner's W-2 gross income. However, the S-corp must make the same percentage contribution for every eligible employee. For a Solo 401(k), the corporation must also pay the employer profit-sharing component through payroll. The employee deferral comes from the owner's W-2 withholding or a separate election.

What happens if a Solo 401(k) participant hires a full-time employee?

The plan must cover the new full-time employee as an eligible participant starting with the plan year in which they meet eligibility requirements (typically age 21, one year of service with 1,000 hours). At that point, the "one-participant plan" is no longer eligible for Solo 401(k) treatment and must be converted to a full 401(k) plan — with the associated administrative requirements, nondiscrimination testing, and Form 5500 filing obligations. Clients should be advised to notify their plan document provider before hiring crosses the full-time threshold.

Is there a SIMPLE IRA option for employers with more than 100 employees?

Under SECURE 2.0 §117 (effective 2024), employers with 101–500 employees that would otherwise exceed the traditional SIMPLE IRA limit may continue to maintain a SIMPLE IRA if they make an enhanced employer contribution: either a 4% match (instead of 3%) or a 3% non-elective contribution (instead of 2%). This transition period lasts for the 5 years following the year the employer first exceeds 100 employees.

Which retirement plan option allows Roth contributions?

Among the three plans discussed, only the Solo 401(k) allows Roth contributions — specifically, Roth employee elective deferrals. The employer profit-sharing contribution to a Solo 401(k) is always pre-tax. Neither the SEP IRA nor the SIMPLE IRA offers Roth contribution elections. An owner can separately fund a Roth IRA ($7,000 in 2025, $8,000 age 50+), subject to income limits ($150,000–$165,000 single phase-out / $236,000–$246,000 MFJ phase-out), in addition to any of the three employer plans.

What is the 2-year rule for SIMPLE IRA participants?

Under IRC §72(t)(6), early distributions (before age 59½) from a SIMPLE IRA within 2 years of the date the participant first had a contribution made on their behalf are penalized at 25% rather than the standard 10%. After the 2-year period, the standard 10% early distribution penalty applies. This rule affects CPAs advising clients who want to roll their SIMPLE IRA balance to a traditional IRA or another employer plan — the rollover itself triggers the penalty if made within the 2-year window. After 2 years, a rollover to a traditional IRA is tax-free and penalty-free.

Should I recommend a defined benefit plan over these options?

For high-income business owners over age 50 who have maximized the $70,000 annual additions limit and still want additional sheltering, a defined benefit or cash balance plan should be evaluated. These plans are funded by actuarially determined contributions that can reach $200,000+ per year for older participants, making them the most powerful available vehicle for high earners making a late start on retirement savings. The tradeoff is cost and administrative complexity: a third-party actuary is required each year, and contributions are mandatory regardless of business performance. They are often paired with a profit-sharing 401(k) to maximize total plan benefits.

IRS contribution limits sourced from IRS Rev. Proc. 2024-40. SECURE 2.0 catch-up provisions reference SECURE 2.0 Act of 2022, Pub. L. 117-328, §§107, 109, 117, 125. Always verify current-year limits at irs.gov before advising clients.

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