Choosing the right retirement plan for your small business is one of the most impactful decisions you’ll make, both for your future and your team’s. Whether you’re a sole proprietor or have a staff of five or more, understanding the differences between SEP IRA, Standard 401(k), and Solo 401(k) is critical to maximizing savings and minimizing stress.
SEP IRA: Simplicity for Teams and Owners
A SEP IRA (Simplified Employee Pension IRA) is beloved for its setup ease and minimal paperwork. It’s ideal if you want a simple, employer-funded plan that covers you and all eligible employees (if you have any).
Key Features:
- Who’s Covered: You and all eligible employees, even if you grow your business later.
- Contributions: Only the employer contributes, up to 25% of salary (maximum $70,000 for 2025).
- Tax Benefits: Pre-tax, tax-deductible contributions; tax-deferred growth.
- Administration: No annual IRS reporting. All contributions vest immediately.
- Downsides: Roth options are new and not widely available yet, no employee salary deferral, or plan loans. Employer must contribute the same percentage of salary for all participants.
- Best For: Owners who value ease and plan to hire or already have employees, and want to offer a high-limit, no-frills retirement benefit.
Standard 401(k): Power and Flexibility for Your Team
A traditional 401(k) is the most versatile and powerful plan for businesses with employees. It permits both employer contributions and employee salary deferral, offering large saving potential and flexibility.
Key Features:
- Who’s Covered: Owners and employees (any business size).
- Contributions: Employees can defer up to $23,500 in 2025; employers can match or add up to a combined $70,000. Extra $7,500 catch-up for those 50+.
- Tax Benefits: Pre-tax contributions and Roth (after-tax) options for employee deferrals; tax-deferred growth.
- Administration: Highest amount of paperwork; annual IRS filings, nondiscrimination testing unless safe harbor. Loans may be permitted.
- Downsides: Higher complexity, costs, and recordkeeping. Must comply with IRS participation, testing, and vesting rules.
- Best For: Owners with multiple employees who want to offer a top-notch retirement plan to themselves and their team, allowing for both employer and employee saving power and maximum flexibility.
Solo 401(k): Max Savings for Owner-Only Businesses
A Solo 401(k) (or individual 401(k)) is like a full-featured 401(k) tailored for one-person businesses or those run jointly by spouses. If you don’t expect to hire employees, this plan shines.
Key Features:
- Who’s Covered: The owner (and spouse, if in business).
- Contributions: Two ways to save: employee deferral ($23,500, plus catch-up if 50+) plus employer contributions (up to $70,000 total for 2025).
- Tax Benefits: Pre-tax and Roth options available; tax-deferred growth.
- Administration: Slightly more paperwork than a SEP, Form 5500-EZ for assets over $250,000. Loans available.
- Downsides: Cannot add non-owner employees without switching the plan, slightly higher setup complexity than SEP IRA.
- Best For: Solo entrepreneurs and owner/spouse businesses, who want to maximize retirement savings and flexibility without staff.
How to Decide?
Here’s a quick decision guide, matched to typical small business situations:
| Situation | Best Fit | Why |
|---|---|---|
| You have employees and want them to save too | 401(k) | Lets employees and employer both contribute; max flexibility |
| You want minimum hassle and only employer contributions | SEP IRA | Easy setup, simple rules, no employee salary deferrals |
| You’re solo owner or owner+spouse, no plans to hire | Solo 401(k) | Save the most, allows loans and Roth option, dual contributions |
Other Considerations
- Tax Filing Deadlines: All three can be set up before your business tax filing deadline (including extensions).
- Growth Plans: Anticipate changing employee status? SEP IRA can easily add more staff. Solo 401(k) must convert to Standard if you hire eligible employees.
- Administrative Complexity: 401(k) has highest reporting and compliance, SEP IRA lowest, Solo 401(k) is in-between.
- Flexibility: 401(k) plans allow loans and Roth features; SEP IRA does now offer Roth, but is not widely available yet.
- Although Roth SEP IRA accounts are now legally allowed, availability and support are still limited—meaning you’ll need to check with your provider to see if they actually offer Roth contributions for a SEP IRA.
Final Advice:
- If you’re owner-only, a Solo 401(k) usually gets you the biggest contributions and most options.
- If you have employees and you want them to save, a standard 401(k) is the gold standard, just expect more paperwork.
- For easy employer-funded savings with minimal fuss, a SEP IRA is your winner.
No matter which plan you choose, you’re taking an important step for your own, and possibly your employees’ financial futures. Talk to a financial advisor or retirement plan specialist before setting up your plan to make sure it matches your goals, budget, and plans for growth.