Retirement for Small Biz Owners: SEP IRA, Solo 401(k), SIMPLE IRA Comparisons—Who Qualifies and When to Use Each
Planning for retirement can be daunting, especially when you’re running a small business. Unlike traditional employees, small business owners bear the sole responsibility of setting up and funding their own retirement plans. Fortunately, there are several tax-advantaged options to help secure your financial future, with the SEP IRA, Solo 401(k), and SIMPLE IRA among the most popular.
This guide breaks down these three options, their eligibility, technical details, and how to decide which is best for your situation—with the latest 2025 limits and key features for compliance.
Why Retirement Planning Matters for Small Business Owners
Running a small business means balancing a lot of financial priorities, but retirement planning should never fall by the wayside. Without employer-sponsored plans, you need to take action to secure your future. The right plan is not only about saving—it can offer significant tax benefits. Contributions are generally tax-deductible for the business, and investment earnings grow tax-deferred (or tax-free with Roth contributions).
Each of the plans below offers specific advantages for small businesses. Understanding how they work is a critical first step.
SEP IRA (Simplified Employee Pension Plan)
Ideal For:
Small business owners (with or without employees) seeking a simple, low-administration option.
How It Works:
A SEP IRA lets employers contribute pre-tax dollars to retirement accounts for themselves and eligible employees.
For 2025, total employer contributions are limited to the lesser of $70,000 or 25% of eligible compensation (IRS Notice 2024-80). For self-employed individuals, due to the IRS’s compensation calculation, the effective contribution rate is about 20% of net self-employment income.
SEP IRAs do not allow employee salary deferrals.
Key Features:
Employer-only contributions, made at the employer’s discretion.
Easy setup and minimal ongoing paperwork.
Works for solo business owners or those with a small workforce.
Who Qualifies:
Any small business owner or self-employed individual. Employers must include employees who are age 21 or older, have worked at least three of the last five years, and earned at least $750 in 2025.
The $70,000 limit is an aggregate limit for all defined contribution plans (including SEP, Solo 401(k), etc.) sponsored by the employer.
Best Use Case:
A SEP IRA is a great option for solo entrepreneurs or small businesses with variable profits who want maximum flexibility. However, it doesn’t support employee salary deferrals, so it may be less appealing for employers seeking to help employees defer part of their pay.
Solo 401(k)
Ideal For:
Self-employed individuals or business owners with no employees other than a spouse.
How It Works:
Solo 401(k) plans are designed for businesses with no employees. As a business owner, you can make contributions in your dual role as both “employee” and “employer” (the IRS treats these as separate for limit purposes). Roth (after-tax) deferral options are also widely available.
Employee contributions: For 2025, you can defer up to $23,500 in salary, plus a $7,500 catch-up (for those ages 50–59; total $31,000). If you are ages 60–63, the special SECURE 2.0 catch-up applies: $10,250 additional, raising the total deferral to $33,750.
Employer profit-sharing contributions (from your business income) can bring your total Solo 401(k) contributions to a maximum of $70,000. For ages 50–59, total contributions can reach $77,500. For ages 60–63, with the higher catch-up, you can contribute up to $81,250.
Key Features:
Higher contribution limits than other small business retirement plans, especially for those 50+.
Roth and traditional options; loans may be permitted.
You retain full control of investments.
Once plan assets exceed $250,000, annual Form 5500-EZ filing is required.
The $70,000 aggregate annual addition limit applies to all defined contribution plans the employer sponsors.
Who Qualifies:
Sole proprietors, partnerships, LLCs, S corporations, and C corporations with no employees except a spouse.
Best Use Case:
Perfect for high-income solopreneurs, freelancers, and owner-only businesses, especially those who want to maximize tax-advantaged savings and/or use Roth contributions.
SIMPLE IRA (Savings Incentive Match Plan for Employees)
Ideal For:
Businesses with up to 100 employees looking for a straightforward plan with both employer and employee contributions.
How It Works:
Employees can make pretax salary deferral contributions. Employers must either match up to 3% of compensation or make a 2% nonelective contribution for all eligible employees.
For 2025, the maximum employee salary deferral is $16,500.
Catch-up contribution for ages 50–59 is $3,500 (total $20,000).
For ages 60–63, the special SECURE 2.0 catch-up is $5,250, allowing a maximum contribution of $21,750.
Employer contributions are required annually—regardless of business profitability—per IRS guidelines.
Key Features:
Simple to administer and fund.
Employees participate directly, supporting recruitment and retention.
Early withdrawals within the first two years are subject to a 25% penalty (greater than the usual 10%).
Required minimum distributions (RMDs) start at age 73 (or 75, depending on birth year, per SECURE 2.0).
Tax-deductible contributions and tax-deferred growth.
Who Qualifies:
Any business with 100 or fewer employees earning at least $5,000 in any prior year.
Best Use Case:
Best for businesses looking to offer meaningful retirement benefits to employees with minimal cost and complexity.
Additional Considerations for All Small Business Retirement Plans
For SEP IRAs and Solo 401(k)s, the $70,000 cap is a total limit across all defined contribution plans an employer sponsors.
For both Solo 401(k) and SEP IRA, the owner can make both employer and employee contributions, but the IRS treats the two roles independently for limit purposes.
All contributions are generally tax-deductible, and investment gains grow tax-deferred. Roth features (where available) provide the option for tax-free qualified withdrawals.
Required minimum distributions (RMDs) are generally required starting at age 73 (or 75, depending on your birth year, under SECURE 2.0).
For SIMPLE IRAs, be aware of the 25% early withdrawal penalty within the first two years of plan participation.
Choosing the Right Plan for Your Business
When deciding among these plans, consider:
Business Size:
Solopreneurs and family businesses often benefit from Solo 401(k) or SEP IRA.
Employers with multiple employees should consider SIMPLE IRA.
Income Level and Stability:
Higher, variable incomes may lean toward Solo 401(k) or SEP IRA for flexibility.
Administrative Burden:
SIMPLE and SEP IRAs are easiest to set up and run; Solo 401(k) has more paperwork (especially over $250,000 in assets).
Employee Engagement:
SIMPLE IRA is designed for businesses wanting to help employees save for retirement.
Assess your circumstances and long-term goals—including succession and exit strategies—to choose the right plan for you and your business.
For Further Reading
To explore small business retirement plans in more depth, see:
IRS Notice 2024-80 (for tax nerds)
These authoritative sources offer up-to-date compliance information for 2025 and beyond.
Planning for retirement as a small business owner doesn’t have to be overwhelming. With the right information and a tax-savvy strategy, you can build a secure financial future for yourself, your business, and your team. Need help? Contact us and start evaluating your options today!