Small business owners and self-employed individuals have access to retirement account options with substantially higher contribution limits than typical employee 401(k) plans — a significant financial advantage that is underutilized by many who do not know these options exist or who find the choices confusing. The three most important options — the SEP-IRA, the Solo 401(k), and the SIMPLE IRA — serve different business situations, have different contribution mechanics, and carry different administrative burdens. Choosing the right one for your specific business structure and income level can meaningfully increase your retirement savings and tax efficiency.
SEP-IRA: The Simplest Option for High Earners
The Simplified Employee Pension IRA is the easiest retirement account for self-employed individuals and small business owners to establish and maintain. It can be opened at any financial institution that offers IRAs, requires minimal paperwork, has no annual filing requirements, and allows contributions up to the contribution deadline including tax return extensions — providing maximum flexibility in timing contributions based on actual annual income. The contribution limit is the lesser of 25 percent of net self-employment income (after the self-employment tax deduction) or $69,000 in 2024, making it capable of sheltering very substantial income from current taxation.
The primary limitation of the SEP-IRA becomes apparent when you have employees. Employers must contribute the same percentage of compensation to all eligible employees’ SEP-IRAs as they contribute to their own — if you contribute 20 percent of your own compensation, you must contribute 20 percent to every eligible employee’s SEP as well. This makes the SEP-IRA potentially expensive for businesses with employees, as generous owner contributions trigger proportional required employee contributions. For truly solo operators with no employees or for business owners whose employees are not yet eligible (typically requiring one year of service, minimum age 21, and $750 in compensation), the SEP-IRA’s simplicity and high contribution ceiling make it an excellent choice.
Solo 401(k): The Higher Contribution Ceiling for Solo Operators
The Solo 401(k) — also called an individual 401(k) or self-employed 401(k) — is available to self-employed individuals and business owners with no employees other than a spouse. It combines employee and employer contribution components that together allow higher total contributions than a SEP-IRA at lower income levels. The employee contribution component allows deferring up to $23,000 of earned income in 2024 (plus $7,500 catch-up for those 50 and older), regardless of income level — meaning a self-employed person earning $60,000 can contribute the full $23,000 employee deferral before any employer contribution calculation. The employer contribution adds up to 25 percent of net self-employment income. The combined limit is $69,000 in 2024, the same ceiling as the SEP-IRA, but the path to that ceiling differs in ways that matter at lower income levels.
At $100,000 of net self-employment income, a SEP-IRA allows approximately $18,587 in contributions (25 percent of net self-employment income after the SE tax deduction). A Solo 401(k) allows $23,000 in employee deferrals plus approximately the same $18,587 in employer contributions — a substantially higher total. The Solo 401(k) also allows Roth contributions in the employee deferral portion, something the SEP-IRA does not offer. The administrative burden is somewhat higher — the plan document must be established by December 31 of the year for which contributions are made, and plans with assets exceeding $250,000 must file an annual Form 5500-EZ. A plan must be closed and cannot accept new contributions once the owner hires any non-spouse employees.
SIMPLE IRA: For Small Businesses with Employees
The Savings Incentive Match Plan for Employees IRA is designed for small businesses with 100 or fewer employees that want to offer a retirement benefit without the administrative complexity of a full 401(k). It is the only employer-sponsored retirement plan in this comparison that is designed specifically for businesses with employees, making it the primary option for small employers who want a manageable retirement benefit. Employees can contribute up to $16,000 in 2024 (plus $3,500 catch-up for those 50 and older) through salary deferrals. Employers must either match employee contributions dollar-for-dollar up to three percent of compensation, or make a flat two percent contribution to all eligible employees regardless of whether they contribute themselves.
The SIMPLE IRA’s mandatory employer contribution makes it more expensive than having no plan for businesses with employees, but the required match or contribution is predictable and often smaller than what generous discretionary contributions to a SEP would require. Setup is relatively straightforward through major financial institutions, and there are no annual filing requirements. The two-year rule is the key administrative characteristic to know: withdrawals within the first two years of participating in the SIMPLE IRA face a 25 percent early withdrawal penalty rather than the standard 10 percent — a significantly higher cost that participants must understand before treating these funds as accessible.
