Solo 401(k) vs SEP IRA vs Defined Benefit: Choosing the Right Retirement Plan for Business Owners
Armando Ramirez6 min read
The year a business finally throws off serious profit is usually the year its owner discovers the retirement plan cannot absorb it. A SEP IRA opened five years ago when revenue was thin now caps out well below what the owner could afford to set aside. The deduction gets left on the table, and by the time anyone notices, the filing deadline has passed.
Retirement plans for business owners are not interchangeable. They differ in how much you can shelter, how much administration they demand, and, most consequentially, what happens once you hire someone.
The Solo 401(k): Two Contributions From One Person
A solo 401(k) works because it lets an owner-only business contribute twice, once as the employee and once as the employer.
The employee side is the elective deferral, capped at $24,500 for 2026. Owners who are 50 or older add a standard catch-up of $8,000, and those who turn 60 through 63 during the year get an enhanced catch-up of $11,250 instead. The employer side adds a profit-sharing contribution of up to 25% of compensation. Everything together runs into the annual additions ceiling of $72,000 for 2026.
That stacking is the whole advantage. Consider an S-corp owner paying themselves $150,000 in W-2 wages. The employer contribution comes to $37,500, and the deferral adds $24,500, for $62,000 sheltered. A SEP IRA on the same $150,000 salary produces $37,500 and nothing more.
Put differently: a solo 401(k) reaches the $72,000 ceiling at roughly $190,000 of compensation. A SEP IRA needs about $288,000 to get there.
The SEP IRA: Simple, Flexible, and Capped Lower Than It Looks
A SEP is the easiest plan to run. No annual Form 5500 in most cases, no testing, and contributions are entirely discretionary, which matters for businesses with lumpy income. Skip a year, fund heavily the next, no penalty either way.
Its real strength is timing. A SEP can be established and funded right up to the tax filing deadline including extensions, which makes it the only meaningful option left for an owner who shows up in August with a surprisingly good prior year. An existing solo 401(k), by contrast, generally needs the deferral election in place before December 31.
The tradeoff is capacity, and one rule that catches people: whatever percentage the owner contributes for themselves must be contributed for every eligible employee.
Defined Benefit and Cash Balance Plans: When $72,000 Is Not Enough
Defined benefit plans, including their modern cousin the cash balance plan, work backward. Instead of capping what goes in, they cap what comes out. The maximum annual pension a defined benefit plan can promise is $290,000 for 2026. An actuary then calculates what must be contributed each year to fund that promise, and the older the owner and the closer to retirement, the larger the required contribution.
For a profitable professional practice owner in their fifties, deductible contributions in the low-to-mid six figures are realistic, often stacked on top of a 401(k) profit sharing plan. The costs are real: actuarial fees every year, Form 5500 filings, and a funding obligation that does not disappear in a bad year. These plans suit owners with high income that is both large and dependable, typically with a five year runway or longer.
| Solo 401(k) | SEP IRA | Defined Benefit / Cash Balance | |
|---|---|---|---|
| 2026 ceiling | $72,000 plus catch-up | $72,000 | Actuarially determined, often far higher |
| Comp needed to max out | About $190,000 | About $288,000 | Varies by age and target benefit |
| Catch-up for age 50+ | Yes | No | Built into the funding math |
| Contribution flexibility | High | Highest | Low, funding is required |
| Annual admin burden | Light until assets grow | Minimal | Actuary plus annual filings |
| Best suited to | Owner-only, moderate to high income | Late deciders, variable income | High, stable income, age 45 and up |
Employees Change the Calculus Completely
This is where most owners get surprised.
A solo 401(k) is only solo. Hire one non-spouse employee who meets the eligibility thresholds and the plan converts into a regular 401(k), which brings nondiscrimination testing, a Form 5500, and usually a safe harbor contribution for staff in the range of 3% to 4% of pay.
A SEP is worse in this scenario, not better. Contribute 20% for yourself and you owe 20% for every eligible employee, with no ability to vest them out over time. For a practice with several employees, that arithmetic can make the owner’s own contribution prohibitively expensive.
Defined benefit and cash balance plans must also cover employees and pass testing, though cross-testing and age-weighting often let a large share of the contribution flow to the owner while staff receive a smaller defined percentage. That flexibility is exactly why the design work requires a specialist.
For South Florida owners, there is one more layer worth naming. Florida imposes no state income tax, so the deduction today is worth only its federal value. But distributions in retirement are also untaxed at the state level, assuming you stay put. Owners weighing pre-tax against Roth should run that comparison against where they actually expect to retire, not just where they file now.
A Roth account isn’t only for the owner, either — a child earning real wages on the business payroll qualifies for one too. See the age thresholds and documentation that make putting your kids on payroll hold up.
The Takeaway
Picking a retirement plan as a business owner is a function of three inputs: how much you want to shelter, how predictable that amount is, and how many people are on payroll. Get those three on paper and the answer usually declares itself. Wait until March and your options shrink to whichever plan still accepts a late contribution.
If you are running a profitable business in South Florida and are not confident your current plan is sized correctly, reach out to OliRam Advisors before year-end, while every option is still on the table.