Retirement plans for business owners
A retirement plan is one of the few ways a business owner can move tens of thousands of dollars a year out of this year's taxable income. Which plan fits depends on your profit, whether you have employees, and how your business is taxed. Here's how they compare.
The plans side by side
| SEP IRA | Solo 401(k) | SIMPLE IRA | Cash balance plan | |
|---|---|---|---|---|
| Who puts money in | The business only | You as employee, and the business | You, and a required business match | The business, as an actuary calculates |
| 2026 limit | 25% of pay (20% of net earnings if self-employed), up to $72,000 | $24,500 deferral plus the business's share, up to $72,000, plus catch-up | $17,000 deferral plus a 2–3% business contribution | Set by the benefit, up to $290,000 a year at retirement — often far above the others near retirement age |
| Employees | Must get the same percentage | Only if none besides you and a spouse | Must be offered, with the match | Must be covered and tested |
| Paperwork | Very little | A plan document; a Form 5500-EZ once assets pass $250,000 | Little | An actuary every year, and a Form 5500 |
| Best for | Simplicity, or a first year set up after year-end | Solo owners who want the most for their income | Small teams who want a cheap plan | High, steady income and an owner in their late 40s or older |
SEP IRA vs solo 401(k)
For an owner with no employees, the solo 401(k) nearly always allows more. Both let the business contribute the same percentage of pay, but the 401(k) adds your own $24,500 deferral on top — and a catch-up of$8,000 from age 50, or $11,250 at ages 60 to 63. At $100,000 of sole-proprietor profit, a SEP takes about $18,600; a solo 401(k) about $43,100.
The SEP's advantages are simplicity and timing: there's almost no paperwork, and one can be set up as late as your tax return's due date, including extensions. Compare them for your income →
If you own an S corporation
Contributions are figured on your W-2 salary, not on the company's profit. Distributions don't count. So the business can put in 25% of your salary, and your deferral comes out of your paycheck. A very low salary limits what you can save — one more thing to weigh when setting reasonable compensation. And if your wages from the business were over $150,000 the year before, catch-up contributions have to be Roth.
If you're self-employed
A sole proprietor's contributions are figured on net earnings: profit, less the deductible half of self-employment tax. The business's share is 20% of that, not 25%, because the contribution itself reduces the earnings it's measured against. The contributions lower your income tax, but not your self-employment tax.
When a cash balance plan makes sense
A cash balance plan is a pension that works like an account. Because the limit is on the benefit at retirement, not on each year's contribution, an owner close to retirement can often put in several times what a 401(k) allows. It comes with an actuary, required contributions every year, and employees who must be included. How cash balance plans work →
When it doesn't fit
- You'll need the money soon. Withdrawals before 59½ generally carry a 10% penalty on top of income tax.
- Cash flow is unpredictable — especially for a cash balance plan, where contributions are required.
- You have employees and haven't priced covering them.
Which plan fits your business, and how much to put in, is a question for your CPA or financial advisor.
Sources
- IRS Notice 2025-67 — the 2026 limits
- IRS Publication 560 — SEP, SIMPLE and qualified plans for small business, and the self-employed rate
- IRC §408(p) — SIMPLE IRA contributions and the employer match
- Department of Labor — cash balance pension plans
- IRS, defined benefit plans — the actuary and the funding
General information, not advice for your situation. Whether a strategy fits depends on your facts — talk to your CPA or tax attorney about whether you qualify before you put it in place. Your accountant remains responsible for your return.
Know where yours stands, all year.
OpenYear reads your books, shows which strategies fit your business and why, and keeps the records each one needs — ready for your accountant. It's built for owner-operated S corporations.