Retirement plan options for small business owners

Once your business is profitable, a retirement plan does something few other decisions do: it lowers this year's tax bill and builds a personal asset that has nothing to do with your business's future value. Most owners know they should have one. Fewer know which one fits their situation.

Here's how the four most common options compare, and how to think about which one is right for you.

SEP-IRA

A Simplified Employee Pension IRA is the easiest plan to set up and maintain, which is exactly why it's the default choice for a lot of solo owners and small teams. For 2026, you can contribute up to 25% of compensation or $72,000, whichever is less. There's no separate employee deferral; contributions come entirely from the employer side.

The tradeoff is that if you have employees, you generally have to contribute the same percentage of compensation for them as you do for yourself. That makes a SEP-IRA straightforward for a true solo operation and considerably more expensive once you're contributing on behalf of a team.

Solo 401(k)

Built for owners with no employees other than a spouse, a Solo 401(k) lets you contribute in two capacities: as the employee and as the employer. For 2026, that means up to $24,500 in employee deferrals, plus employer contributions of up to 25% of compensation, for a combined limit of $72,000. Owners 50 and older can add a catch-up contribution, and the catch-up jumps further for those 60 to 63.

Because the employee deferral doesn't depend on a percentage of income, a Solo 401(k) often lets you contribute more than a SEP-IRA at the same income level, particularly at lower income levels where 25% of compensation would fall short of the employee deferral limit on its own. Many providers also allow a Roth option and loans against the balance, which SEP-IRAs don't offer.

SIMPLE IRA

A Savings Incentive Match Plan for Employees works well for small businesses with a handful of employees who want a plan simpler than a full 401(k) but who still want employees contributing their own money. For 2026, employees can defer up to $17,000, with a $4,000 catch-up for those 50 and older.

As the employer, you're required to either match employee contributions up to 3% of compensation, or make a flat 2% contribution for every eligible employee regardless of whether they contribute. That required contribution is the tradeoff for lower administrative cost and no annual filing requirement, which a full 401(k) does require.

Defined benefit plan

This is the option most owners have never heard of, and it's usually the most powerful one for a specific situation: an owner in their 50s or older, consistently high income, trying to catch up on retirement savings in a compressed number of years. A defined benefit plan works like a traditional pension. An actuary calculates a required annual contribution based on the retirement benefit you're targeting, and that contribution can run well into six figures depending on age and income.

The complexity and cost of administering a defined benefit plan are serious: actuarial calculations, mandatory annual contributions, and higher setup and maintenance fees than any of the plans above. It's rarely the right first plan. It's often the right plan for an owner who has maxed out a Solo 401(k) for years and has the income to justify the overhead.

How to think about which one fits

Start with two questions: do you have employees, and how much do you want to contribute?

• Solo, want maximum contribution flexibility: Solo 401(k) usually wins, especially at income levels where the employee deferral makes a real difference.
• Solo, want the simplest possible setup: SEP-IRA, if you're comfortable with contributions being purely percentage-based.
• A few employees, want them contributing too: SIMPLE IRA, if you can handle the required match or flat contribution.
• Older, high income, catching up fast: Defined benefit plan is worth a real conversation, even though it's the least common answer.

The full comparison, including setup deadlines and administrative requirements, is worth having in front of you as a reference. We put together a comparison chart that lays out all four side by side.

Want help picking the right plan for your business?

A Vibe Check is a free, no-pressure conversation where we look at your actual numbers and figure out which plan makes sense, together. Schedule yours here.

Keep reading

These posts give you more context on the tax side of these decisions:

• Common deductions small business owners miss: retirement contributions are one of six categories owners consistently underuse.
• Fringe benefits by entity type: how your business structure affects what benefits, including retirement plans, are available to you as an owner.
• Understanding your numbers: what your P&L actually tells you: knowing your real profit is the first step in deciding how much you can afford to contribute.

This post is general information, not advice for your specific situation. Retirement plan rules involve deadlines, contribution formulas, and employee requirements that vary by plan and by year. Talk to a tax professional before you set one up. That's what we're here for.