SEP vs SIMPLE vs Solo 401k — Which Retirement Plan Fits You Best?
Choosing the right retirement plan as a self-employed professional or small business owner can feel like a financial maze. Among the most popular options are the SEP IRA, SIMPLE IRA, and Solo 401k. Each plan has unique rules, tax benefits, and contribution limits — and the right choice depends on your business size, income, and long-term goals.
In this guide, we’ll break down .SEP vs SIMPLE vs Solo 401k in plain English, compare their pros and cons, and help you pick the best fit for your situation.
What is a SEP IRA?
SEP IRA stands for Simplified Employee Pension Individual Retirement Arrangement. It’s designed for self-employed individuals and small business owners, especially those who want minimal paperwork and flexible contributions.
Key Features of a SEP IRA:
- Contribution limit (2025): Up to 25% of compensation or $69,000, whichever is lower.
- Employer-funded only: Only the employer contributes — employees cannot add their own money.
- Flexible contributions: You can change the contribution amount each year or skip a year entirely.
- Tax benefits: Contributions are tax-deductible for the employer.
Best For:
- Solo entrepreneurs without employees.
- Small business owners who want the option to vary contributions annually.
What is a SIMPLE IRA?
SIMPLE IRA stands for Savings Incentive Match Plan for Employees. It’s often considered a “starter” retirement plan for small businesses with 100 or fewer employees.
Key Features of a SIMPLE IRA:
- Contribution limit (2025): Up to $16,000, plus a $3,500 catch-up for those aged 50+.
- Employer contributions required: Employers must either match up to 3% of employee pay or contribute 2% for all eligible employees, regardless of participation.
- Easier setup than a 401k: Less complex paperwork and no annual IRS filing.
- Immediate vesting: All contributions belong to the employee immediately.
Best For:
- Small businesses with multiple employees.
- Owners who want a straightforward, lower-cost plan with mandatory employer contributions.
What is a Solo 401k?
A Solo 401k (also called an Individual 401k) is built for self-employed people with no employees other than a spouse. It combines features of a traditional 401k but is tailored for one-person businesses.
Key Features of a Solo 401k:
- Contribution limit (2025): Up to $69,000 total (employee + employer contributions), plus $7,500 catch-up if aged 50+.
- Dual contributions: You can contribute as both an employee (salary deferral) and an employer (profit-sharing).
- Roth option available: Some Solo 401ks allow Roth contributions for tax-free withdrawals later.
- Loan feature: You can borrow from your Solo 401k, unlike SEP or SIMPLE IRAs.
Best For:
- Self-employed individuals with high income.
- Business owners without employees who want to maximize contributions.
SEP vs SIMPLE vs Solo 401k: Side-by-Side Comparison
| Feature | SEP IRA | SIMPLE IRA | Solo 401k |
|---|---|---|---|
| Max Contribution (2025) | $69,000 | $16,000 (+$3,500 catch-up) | $69,000 (+$7,500 catch-up) |
| Who Contributes | Employer only | Employer + employee | Employer + employee |
| Best For | Self-employed, few/no employees | Small businesses with employees | Self-employed, no employees |
| Complexity | Low | Low | Medium |
| Roth Option | No | No | Yes (if plan allows) |
| Loan Option | No | No | Yes |
| IRS Filing Required | No | No | Yes (Form 5500 if assets > $250k) |
Pros and Cons of Each Plan
SEP IRA Pros:
✅ High contribution limit.
✅ Simple to set up and manage.
✅ Flexible year-to-year contributions.
Cons:
❌ Employer must contribute equally for all eligible employees.
❌ No Roth option.
SIMPLE IRA Pros:
✅ Easy setup with low administrative costs.
✅ Allows employee and employer contributions.
✅ Great for small teams.
Cons:
❌ Lower contribution limits compared to Solo 401k and SEP.
❌ Mandatory employer contributions.
Solo 401k Pros:
✅ Highest potential contributions for self-employed individuals.
✅ Roth option available.
✅ Ability to take a loan.
Cons:
❌ More paperwork and IRS filing if assets exceed $250k.
❌ Not available if you have employees (other than a spouse).
How to Choose Between .SEP vs SIMPLE vs Solo 401k
Your decision depends on your business structure, income level, and number of employees:
- If you’re a high-earning solopreneur: A Solo 401k often provides the biggest tax-advantaged savings.
- If you have employees but want low-cost setup: Consider a SIMPLE IRA.
- If you want maximum flexibility with occasional contributions: The SEP IRA is ideal.
Tip: Remember that all three options are tax-advantaged, so whichever you choose, you’re still making a smart move toward retirement security.
Real-World Example
Let’s compare three scenarios:
- Anna, freelance graphic designer (no employees):
- Annual income: $120,000.
- Best fit: Solo 401k — lets her contribute up to $69,000 and potentially use Roth savings.
- Mike, small café owner (5 employees):
- Wants simple plan for his team.
- Best fit: SIMPLE IRA — easy to manage with required 3% match.
- Sara, seasonal business owner:
- Income varies year to year.
- Best fit: SEP IRA — can skip contributions in slow years.
Final Thoughts
When it comes to .SEP vs SIMPLE vs Solo 401k, there’s no one-size-fits-all answer. Each plan has its strengths, and the right choice depends on your income, team size, and willingness to manage paperwork.
If you’re still unsure, talk to a financial advisor who can run the numbers for your exact situation. Whichever you choose, starting now means your future self will thank you — and maybe even buy you a margarita on the beach one day.