Choosing the Right Retirement Plan for Your Small Business: SEP, SIMPLE, or Individual (k)?
By Jodie Norquist, CIP, CHSP
If your client owns a small business, they’re already juggling a lot. Between managing clients, balancing budgets, and keeping operations moving, retirement planning often falls to the bottom of the list. Yet choosing the right retirement plan can be a game changer, not just for the business owner, but for their employees as well.
The good news? Small and mid-sized businesses have three flexible cost-effective options worth considering: SEP plans, SIMPLE IRA plans, and Individual(k) plans. Each plan offers unique advantages, depending on your clients’ goals, their workforce, and how much administration they’re willing to take on.
Let’s compare these three plans side by side. Think of this as a quick guide to choosing the best fit.
SEP Plan: Flexibility First
The simplified employee pension (SEP) plan is about as straightforward as a retirement plan can get. Employers make contributions, but employees don’t. It keeps things simple, but it also means that employees don’t have the opportunity to put in their own money. There are, however, are several benefits to offering a SEP plan.
Contribution limits are generous: Up to 25 percent of compensation, capped at $70,000 for 2025.
Paperwork is minimal: No annual Form 5500 filings, and no tracking employee deferrals.
Fairness is required: If the employer contributes for herself, she generally must contribute the same percentage of compensation for all eligible employees. (Alternative SEP plan documents may permit other allocation formulas, but they are rarely used.)
For businesses with variable income, SEP plans can be a great retirement tool. Employers can contribute more in years when revenue is strong and scale back in lean years without penalty. Employer contributions are always discretionary from year to year.
Another new benefit allows employers to offer a Roth feature. Any SEP contributions made to a Roth IRA are included in the recipient’s gross income, while still being treated as an expense of the business sponsoring the plan.
SIMPLE IRAs: A Shared Savings Effort
The savings incentive match plan for employees of small employers (SIMPLE) IRA is a step up in employee engagement. Both employers and employees contribute to this type of retirement plan, which encourages staff to save for their retirement while showing that the company is invested in it, too. Setting up a SIMPLE IRA plan is relatively easy, although employers will need to track contributions and process employee deferrals through their payroll function.
Employees can defer up to $16,500 for 2025, plus an extra $3,500 catch-up contribution if they’re age 50 or older. A $5,250 catch-up contribution for employees ages 60-63 is also available. In addition, an increased salary deferral limit is available for both base salary deferrals and catch-up contributions for those age 50 or older. For 2025, the increased limit is $17,600, plus a $3,850 catch-up contribution. This increase is automatic for SIMPLE IRA plans with 1-25 employees who received at least $5,000 of compensation in the preceding year. It is optional for larger plans with 26-100 such employees.
Employers must contribute, either by matching up to three percent of an employee’s compensation or making a flat two percent nonelective contribution. If larger plans offer an increased deferral limit, the required three percent matching contribution is increased to four percent, and the two percent nonelective contribution is raised to three percent. Since 2024, an optional employer nonelective contribution can be made in addition to the mandatory matching or nonelective contribution. For 2025, this maximum discretionary nonelective contribution is the lesser of 10 percent of an employee’s compensation, or $5,100.
The SIMPLE IRA plan is limited to businesses with 100 or fewer employees who earned $5,000 or more in the preceding year, making it a good fit for small, but growing companies. If an employer chooses to provide a three percent matching contribution, employees would need to also contribute to that limit if they were to receive the full employer match. This gives employees some skin in the game while keeping administrative work manageable. Employers may also choose to allow deferrals to be made on an after-tax basis as Roth SIMPLE contributions.
Individual (k) Plan: Maximum Savings Potential
Also known as a Solo 401(k) plan, the Individual(k) plan is designed for owner-only businesses (and their spouses). It combines the power of employer and employee contributions, which makes it the most robust of the three plans.
Contributions can go higher than any other option—$70,000 for 2025 when combining deferrals and employer contributions. Extra catch-up contributions are available ($7,500 if age 50 or older, $11,250 if age 60–63), and raise this $70,000 limit by the applicable catch-up amount.
Individual(k) plans offer tax flexibility: these plans can allow for Roth contributions and even participant loans.
There is moderate plan administration. Employers must file Form 5500 once plan assets exceed $250,000, but the Individual(k) plan reporting requirements are much simpler than a traditional 401(k) plan.
This plan is the best fit for self-employed individuals who want to maximize their retirement savings with extra tax planning flexibility.
Making the Right Retirement Savings Choice
There’s no one-size-fits-all retirement plan. A SEP plan may be perfect for a self-employed consultant with fluctuating income. A SIMPLE IRA could be the right fit for a family-run or small business that wants to encourage employee participation. And an Individual(k) plan could help an ambitious solo entrepreneur set aside some serious savings while taking advantage of Roth contributions.
At the end of the day, the best choice comes down to your clients’ business structure, their saving goals, and how much complexity they’re comfortable managing. Partnering with a financial or tax professional can help ensure your clients’ retirement plan not only checks the compliance boxes but also helps secure the future they’re working hard to build.
Would you like to learn more about small business retirement plan options? Check out IRS Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans).
