SIMPLE IRA vs. SEP IRA vs. Solo 401(k): Which Retirement Plan Fits Your Small Business?

Retirement · 6 min read · Updated October 16, 2026

When you work for a big company, retirement savings mostly run on autopilot: HR hands you a 401(k) enrollment form, you pick a percentage, done. When you are the company — or the whole company is you — nobody hands you anything. You're the HR department, and the retirement plan decision is yours.

The good news: three plans were designed exactly for businesses like yours. The bad news: they work very differently, and the right one depends on what your business actually looks like. Here's the plain-English guide.

The three plans, in one paragraph each

SEP IRA — You (the employer) fund the whole thing, up to 25% of each eligible employee's pay (max $72,000 per person for 2026). You choose the percentage year by year, and you can choose zero in a bad year.

SIMPLE IRA — A partnership: employees contribute from their own paychecks (up to $17,000 each for 2026), and you're required to add a modest employer piece on top every year — either a match or a flat percentage for everyone eligible.

Solo 401(k) — A regular 401(k) shrunk down for a business with no employees except you (and your spouse). You contribute twice: once as the "employee" (up to $24,500 for 2026) and once as the "employer" (up to 25% of pay), for a combined max of $72,000.

Plan 1: SEP IRA — "I'll fund it generously when I can"

How it works: Only the employer contributes — employees can't put in their own money. The percentage you pick must apply equally to everyone, including yourself: contribute 15% of your own pay, and it's 15% for every eligible employee. Every dollar vests immediately and employees can withdraw anytime (early-withdrawal taxes still apply). Eligibility is broad: generally anyone 21 or older who's worked for you in three of the last five years. No annual IRS filings.

Example: Daniel runs a marketing consultancy with four employees. His income swings — $300K one year, $120K the next. In a great year, he contributes 20% of everyone's pay, sheltering close to the $72,000 max for himself while giving his team a serious benefit. In a lean year, he contributes nothing, no penalty. The SEP is his recruiting pitch ("we fund your retirement at 20%") and his tax shelter in one.

Best for: Owners who want to put away large amounts for themselves, have variable income, and are comfortable funding everyone's account at the same percentage. The catch: with many employees, that uniform percentage gets expensive fast.

Plan 2: SIMPLE IRA — "I'll offer a way to save without breaking the bank"

How it works: Available to businesses with 100 or fewer employees. Employees drive the savings through payroll deductions — $17,000 each for 2026 ($18,100 if you have 25 or fewer employees). Workers 50+ can add $4,000 more; ages 60–63 get $5,250. Your required employer piece is modest: either match employee contributions dollar-for-dollar on the first 3% of pay, or contribute 2% of pay for every eligible employee. Eligibility is narrow by design — an employee must have earned at least $5,000 from you in any two prior years — which naturally limits the plan to longer-term staff.

Example: Priya owns a bakery café with 12 part-time staff and constant turnover. She can't afford a 401(k) with its admin costs, and she doesn't want to fund retirement for someone who leaves in three months. With a SIMPLE IRA, her baristas who stick around can save $17,000 a year, her required cost is just a small match, and the $5,000/two-year rule quietly keeps short-timers out. She offers a real benefit; her required spend stays small.

Best for: Cost-conscious owners, especially with part-time or high-turnover workforces, who want to offer a way to save without a big mandatory bill. The tradeoff: your own savings as an employee are capped at that same $17,000/$18,100.

Plan 3: Solo 401(k) — "It's just me (and maybe my spouse)"

How it works: Only available if you have no full-time employees besides yourself and your spouse — the moment you hire one, you outgrow it. Because it's just you, you play both roles. As the "employee," you defer up to $24,500 of pay for 2026 ($32,500 at 50+, $35,750 at ages 60–63) — pre-tax or Roth, your choice. As the "employer," you add up to 25% of your W-2 salary (20% of net earnings if you're a sole proprietor). Combined cap: $72,000 for 2026 ($80,000 at 50+, $83,250 at 60–63). You can also borrow from it, which you can't do with a SEP or SIMPLE IRA.

Example: Marcus is a freelance software developer, solo, no employees. He nets about $150,000. With a SEP IRA, he could only put away 20% — roughly $28,000. With a Solo 401(k), he defers $24,500 as the employee plus the employer piece, getting to roughly $49,000 total. Same income, $21,000 more in tax-advantaged savings, just by picking the plan that lets him wear two hats. (This is also the plan a self-employed friend of mine picked after comparing it against a SEP — the math wasn't close.)

Best for: Self-employed people with no employees who want the highest possible contributions. The catch: hire your first full-time employee and you need a new plan.

Side-by-side comparison

	SEP IRA	SIMPLE IRA	Solo 401(k)
Who funds it	Employer only	Employees + required employer piece	You, as employee + employer
2026 max for you	25% of pay, up to $72,000	$17,000 employee deferral ($18,100 if ≤25 employees) + small employer piece	$24,500 + employer piece, up to $72,000 total
Catch-up (50+)	None	$4,000 ($5,250 at 60–63)	$8,000 ($11,250 at 60–63)
Employees allowed	Yes	Yes (≤100 employees)	No (only you + spouse)
Required employer cost	$0 in any year you choose	Match or 2% nonelective, every year	N/A — it's all you
Year-to-year flexibility	Total — contribute or skip freely	Low — employer piece is mandatory	High — contribute what you want
Roth option	No	Yes (employee contributions)	Yes (employee deferrals)
Loans	No	No	Yes
IRS filings	None	None	None until assets exceed $250,000 (then Form 5500-EZ)

Which one is yours? Four questions

1. Do you have employees? No → Solo 401(k), almost always. Yes → SEP or SIMPLE.
2. How much do you want to save for yourself? Maximum dollars → SEP (up to $72,000, all employer-funded) or Solo 401(k). Modest → SIMPLE is fine.
3. How stable is your income? Swings year to year → SEP's contribute-or-skip flexibility. Steady → SIMPLE's fixed structure is no burden.
4. What's your workforce like? Many employees or high turnover → SIMPLE keeps your required cost low and the eligibility rule filters naturally. A few valued people you want to reward → SEP's generous uniform contributions.

There's no universally "best" plan — only the one that matches how your business actually runs. Pick that one, and the tax savings follow.

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Try it yourself: Answer five questions about your business and get a personalized recommendation with our Small Business Retirement Plan Finder.

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Sources:

• IRS Notice 2025-67 (2026 limits): Solo 401(k) — $24,500 employee deferral ($32,500 at 50+, $35,750 at 60–63); $72,000 combined limit ($80,000 at 50+, $83,250 at 60–63); employer 25% of W-2 / 20% of net self-employment earnings.
• IRS: SIMPLE IRA plan rules for 2026 — $17,000 deferral ($18,100 for employers with 25 or fewer employees); $4,000 catch-up at 50+, $5,250 at 60–63; ≤100 employees; $5,000-in-two-years eligibility.
• IRS: SEP contribution limits for 2026 — lesser of 25% of compensation or $72,000; $360,000 compensation cap; employer-only contributions; no annual Form 5500.