Solo 401(k) vs. SEP IRA vs. SIMPLE IRA

A Solo 401(k) usually allows the highest contributions for a self-employed owner with no employees. A SEP IRA is the simplest, funded only by the employer as a percentage of pay. A SIMPLE IRA suits small companies that want employee deferrals with low administration. A financial advisor for business owners in Chattanooga can match the plan to your income and staff.

Solo 401(k)

For owners with no employees other than a spouse. You contribute as both employee (up to $24,500 in 2026, plus catch-up if 50 or older) and employer (a percentage of compensation), up to an overall annual limit. Roth contributions and plan loans may be available. Annual Form 5500-EZ filing is required once assets exceed $250,000.

SEP IRA

Employer-only contributions as a percentage of compensation, up to an annual limit. Very easy to set up and maintain. If you have eligible employees, you must contribute the same percentage for them.

SIMPLE IRA

For businesses with up to 100 employees. Employees defer salary, and the employer makes a required match or non-elective contribution. Deferral limits are lower than a 401(k).

How to Choose

• No employees and high income: Solo 401(k) often maximizes savings.
• Variable income and simplicity: SEP IRA.
• A few employees who want to save: SIMPLE IRA or a full 401(k).

Timing Matters

Setup and contribution deadlines differ. Some plans can be opened after year-end for the prior tax year, while others must be established during the year. Plan ahead of December.

Example: A Consultant With No Employees

A self-employed consultant with strong net earnings can often contribute more with a Solo 401(k) than a SEP IRA, because the Solo 401(k) allows an employee deferral on top of the employer contribution. At lower income levels the difference is even larger in percentage terms.

Adding Employees Changes the Answer

Once you hire eligible employees, a Solo 401(k) is no longer available, and SEP contributions must be made for eligible staff at the same percentage. A SIMPLE IRA or a full 401(k) with a safe harbor design may then fit better.

Coordinating With Your Overall Plan

The best plan is not only about this year's deduction. Roth options, how much to keep liquid in the business and your exit timeline all influence which plan fits.

Key Takeaways

• Solo 401(k): highest limits for owners without employees.
• SEP IRA: simplest, employer-only contributions.
• SIMPLE IRA: employee deferrals with low administration.
• Check setup deadlines before year-end.

Frequently Asked Questions

Can I have a Solo 401(k) if my spouse works in the business?

Yes. A spouse employed by the business can participate without disqualifying the plan.

Can I switch from a SEP to a Solo 401(k)?

Yes. Many owners move to a Solo 401(k) as income grows to increase contributions.

Are SIMPLE IRA contributions mandatory for the employer?

Yes. Employers must make either a matching or non-elective contribution each year.

Choosing a plan for your company? Talk with our financial advisor for business owners in Chattanooga.

This article is for educational purposes only and is not individualized investment, tax or legal advice. Talk with a qualified professional about your specific situation.