Solo 401(k) vs SEP IRA vs SIMPLE IRA
The three retirement plans small business owners choose between, what each lets you contribute, and the deadlines that decide which you can still open.
Reviewed by the Fairlight Accounting cross-border tax team — U.S. & Canadian Tax Desks
A Solo 401(k), a SEP IRA, and a SIMPLE IRA are the three retirement plans most small business owners choose between. A Solo 401(k) usually allows the most savings at modest income and works only without employees. A SEP is the simplest to run. A SIMPLE suits businesses with staff that want employee deferrals at low cost.
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How do the three compare?
| Feature | Solo 401(k) | SEP IRA | SIMPLE IRA |
|---|---|---|---|
| Who it fits | Owner (and spouse) with no other employees | Any size; best with few or no employees | Up to 100 employees |
| Owner contributions | Employee deferral plus employer contribution | Employer contribution only | Employee deferral plus employer match |
| 2026 employee deferral | $24,500 | None | $17,000 ($18,100 if the employer had 25 or fewer employees) |
| Catch-up at 50+ (2026) | $8,000 ($11,250 at ages 60–63) | None | $4,000, or $3,850 where the $18,100 limit applies ($5,250 at ages 60–63) |
| Employer contribution | Up to 25% of pay (20% of net self-employment earnings) | Up to 25% of pay (20% of net self-employment earnings) | 3% match or 2% non-elective |
| Overall cap (2026) | $72,000 plus catch-up | $72,000 | Deferral plus employer contribution |
| Roth option | Yes | Yes (since 2023, if the provider offers it) | Yes (since 2023, if the provider offers it) |
| Employees must be covered | Plan ends being "solo" once eligible staff are hired | Same percentage for all eligible employees | Required match or contribution for eligible employees |
| Annual filing | Form 5500-EZ once year-end plan assets reach $250,000 | None | None |
Why does a Solo 401(k) usually win at lower income?
Because it combines two buckets. A sole proprietor with $80,000 of 2026 net profit can defer the full $24,500 employee amount and add an employer contribution of about $14,870 — 20 percent of profit after the deduction for half of self-employment tax — for roughly $39,370 in total. In a SEP, the same owner is limited to the roughly $14,870 employer piece. At very high earnings both plans reach the same $72,000 overall cap (plus catch-up in the Solo 401(k)), and the SEP's simplicity starts to matter more.
What happens when you have employees?
A SEP requires the same contribution percentage for every eligible employee as for the owner — generous to staff, expensive for the owner. A SIMPLE requires a 3 percent match (or a 2 percent contribution for everyone) but lets employees save on their own. Once a business has several employees and the owner wants high contributions, a full 401(k) with a safe-harbor design or a cash balance plan is usually the next step.
What are the setup deadlines?
- SEP IRA: can be established and funded up to the tax return due date, including extensions.
- Solo 401(k): a plan adopted after year-end, up to the tax return due date including extensions, can be treated as in place for that year for employer contributions; a sole proprietor who is the business's only employee can also make first-year employee deferrals if they are made before the return's original due date (without extensions).
- SIMPLE IRA: generally must be set up by October 1 of the year it begins.
Frequently asked questions
Can my spouse join my Solo 401(k)?
Yes, if your spouse earns income from the business. A working spouse can make their own deferral and receive an employer contribution, roughly doubling household savings.
Can I have a 401(k) at my day job and a Solo 401(k) for my side business?
Yes, but the employee deferral limit is shared across all plans. The employer contribution to the Solo 401(k) is separate.
Do S corporation owners calculate contributions differently?
Yes. Contributions are based on the owner's W-2 salary, not on profit distributions. A low salary limits the employer contribution.
Can I switch plans later?
Generally yes, at year boundaries. A business with a SIMPLE IRA generally cannot maintain another plan in the same year, so most switches are planned for January 1 — the main exception, since 2024, is replacing a SIMPLE IRA mid-year with a safe harbor 401(k).
Official sources
The IRS explains: “It's a traditional 401(k) plan covering a business owner with no employees, or that person and his or her spouse. These plans have the same rules and requirements as any other 401(k) plan.” — Internal Revenue Service, One Participant 401k Plans, https://www.irs.gov/retirement-plans/one-participant-401k-plans
The IRS explains: “You can set up a SEP for a year as late as the due date (including extensions) of your business income tax return for the year you want to establish the plan.” — Internal Revenue Service, Simplified Employee Pension plan (SEP), https://www.irs.gov/retirement-plans/plan-sponsor/simplified-employee-pension-plan-sep
The IRS explains: “You can set up a SIMPLE IRA plan effective on any date from January 1 through October 1 of a year, provided you did not previously maintain a SIMPLE IRA plan.” — Internal Revenue Service, SIMPLE IRA plan, https://www.irs.gov/retirement-plans/plan-sponsor/simple-ira-plan
Next step
Fairlight Accounting handles U.S. domestic, cross-border (U.S.–Canada), and international tax returns, plus bookkeeping, payroll, and CFO advisory. Our U.S. Tax Desk calculates the maximum contribution under each plan before you open one. See pricing or book a free fit call.
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