Choosing the Right Retirement Plan for Your Small Business: SEP-IRA vs 401(k) – A Game-Changer for Your Financial Future

As a small business owner, selecting the right retirement plan can be one of the most impactful decisions you make for both your business and personal financial security. Providing a retirement plan is not just a benefit for your employees—it’s also a powerful tool to attract and retain top talent, foster loyalty, and offer potential tax benefits to both employees and the company. However, navigating the myriad retirement plan options can be overwhelming.

The most popular retirement plan options for small businesses include 401(k) plans, SIMPLE (Savings Incentive Match Plan for Employees) IRAs, and Simplified Employee Pension (SEP) IRAs. Today, we’ll focus on the two most common choices: SEP-IRAs and 401(k) plans, helping you understand which option best fits your business needs.

Understanding SEP-IRA Plans

A Simplified Employee Pension IRA (SEP IRA) is a retirement account for anyone who is self-employed, owns a business or earns freelance income. A SEP IRA serves as a cost-effective option for small businesses who want to contribute to their retirement savings as well as those of their employees.

For 2025, the main advantage of a SEP IRA is that you can contribute up to 25% of your compensation, with a maximum of $70,000 in 2025 (that’s up $1,000 from $69,000 in 2024). These contributions are tax deductible and the earnings are deferred from taxes.

They are simple to administer and do not require the same discrimination testing that 401(k) plans do (with the exception of safe harbor 401(k) plans). Employers do not have to make any official commitment to annual contributions to the account, and contribution limits are high compared to a Simple IRA or Roth IRA.

Key SEP-IRA Limitations to Consider

However, SEP-IRAs come with specific constraints that business owners must understand:

• SEP IRA plans only allow the employer to make contributions to employee accounts—employees are not able to contribute.
• Employers who contribute to their own account are also required to make proportional contributions for each eligible employee.
• Roth contributions are not allowed, meaning employers are not able to pay taxes on contributions now and take distributions tax-free in retirement.
• One key drawback is that there is no catch-up contributions for older workers.

401(k) Plans: Greater Flexibility with More Complexity

A 401(k) plan is a traditional retirement plan available for small and large businesses. For 2025, 401(k) deferral limit for those under age 50 for 2025 is $23,500. For those age 50 or older there are various catch-up contributions that apply based on your age. The SECURE 2.0 Act increases the catch-up contribution limit for employees who turn age 60-63 during the plan year to $11,250 in 2025.

With a self-employed 401(k), you can save up to $23,500 in 2025 in your plan as an employee deferral, just as you would in a regular 401(k). Since you’re also the employer, you’re able to make an employer contribution to the account, as much as 25 percent of the business’s income, up to a total account value of $70,000 for 2025.

Solo 401(k) vs SEP-IRA: The Numbers Game

Despite similar limits on annual contributions, the solo 401(k) can help you save more quickly. The SEP IRA allows you to save 25 percent of your income in the account. Self-employed people may be able to save more in a solo 401(k) than they can in a SEP IRA. Solo 401(k)s let you make both employee and employer contributions, meaning you can contribute up to $23,500 for 2025 ($31,000 in 2025) as an employee, even if that is 100% of your self-employed earnings for the year, and you can also contribute 20% of your net self-employment income.

Which Plan Is Right for Your Business?

Choosing the right retirement plan for your small business depends on several factors: the size of your workforce, the flexibility of contributions, and your administrative capacity. If you want high contribution limits and flexible plan design, a 401(k) is probably the best option. On the other hand, if you’re seeking a simple, low-cost plan, a SIMPLE IRA or SEP IRA may be more suitable.

For businesses with employees, the SEP-IRA’s requirement for equal percentage contributions across all eligible employees can become costly. The downside for you, as the business owner, is that you have to make contributions for employees, and they must be equal — not in dollar amount, but as a percentage of pay — to the ones you make for yourself. That can be costly if you have more than a few employees or if you’d like to put away a great deal for your own retirement. You cannot use a SEP to save only for yourself; if you contribute for the year, you have to make contributions for all eligible employees.

Professional Guidance Makes the Difference

Given the complexity of retirement plan regulations and the significant impact on your business’s financial future, consulting with a qualified accountant Brooklyn, PA can provide invaluable guidance. Professional tax advisors understand the nuances of both SEP-IRAs and 401(k) plans, helping you navigate contribution limits, compliance requirements, and tax implications.

All County Tax Resolution, serving businesses in Pennsylvania and New York, specializes in helping small business owners understand their retirement planning options. Their expertise includes accounting, QuickBooks ProAdvisor services, bookkeeping, and payroll service. They are recognized for excellent customer satisfaction by providing prompt and professional assistance while maintaining the highest level of privacy and confidentiality throughout the resolution process, achieving complete resolution in the shortest amount of time.

Making Your Decision

You can’t go wrong investing in a SEP IRA or solo 401(k). They both offer tax-deferred growth and an opportunity to make Roth contributions. Contribution limits for both types of accounts are generous and neither creates a large administrative burden.

The choice ultimately depends on your specific circumstances:

• Choose a SEP-IRA if: You want simplicity, have few or no employees, and prefer minimal administrative burden
• Choose a 401(k) if: You want maximum contribution flexibility, have employees who want to make their own contributions, or need Roth options

For many solo entrepreneurs, the best retirement plan comes down to funding goals and cash flow. So if maximum income deferral is your goal, the Solo 401(k) is probably the best retirement plan. If not, depending on your entity structure, a SEP IRA may be the way to go.

Remember, these plans are easy for a small business owner — even a self-employed freelancer — to start quickly while generating serious tax breaks. The key is choosing the right plan for your unique situation and implementing it properly to maximize your retirement savings potential.