One of the questions I hear frequently is, “What type of retirement plan should I have?”
My answer is usually the same: It depends on what you are trying to accomplish.
There is no single retirement plan that is right for every business or organization. How much you want to contribute, the number of employees you have, the benefits you want to provide them, your cash flow, and your long-term goals can all influence which plan makes sense.
The plan should fit the goal. Let's look at five common options.
SEP IRA
A SEP IRA allows an employer to make retirement contributions for eligible employees. Employees do not make elective salary deferrals into a traditional SEP. Contributions are made by the employer.
For 2026, employer contributions are limited to the lesser of 25% of compensation or $72,000 per participant. Special contribution calculations apply to self-employed individuals.
Why Can a SEP IRA Be Attractive to a Solo Business Owner?
There are several reasons:
- Simple administration. SEP IRAs do not have the same annual filing and administrative requirements as traditional 401(k) plans.
- High contribution potential. The 2026 maximum contribution is $72,000, subject to the applicable compensation and contribution limits.
- Flexibility from year to year. SEP contributions do not have to be made every year. A business owner can contribute more in a strong year and less, or nothing, in another year.
- Business tax deduction. SEP contributions made by the employer are deductible, subject to IRS deduction limits.
- Relatively easy to establish and maintain. A SEP does not require the same level of ongoing administration as a traditional 401(k).
- More time to make the decision. A SEP can be established as late as the due date, including extensions, of the employer's income tax return for the year.
- No additional employees to fund for a solo owner. When a business has eligible employees, the employer generally must contribute the same percentage of compensation for eligible employees that it contributes for the owner.
That last point is important. For a solo owner, a significant SEP contribution only has to be funded for the owner. Once a business has eligible employees, a large contribution for the owner can also mean making employer contributions for those employees.
That doesn't mean a SEP is only appropriate for businesses without employees, but it helps explain why the structure can be especially attractive to a solo business owner.
What Is the Tax Advantage?
SEP contributions made by the employer are deductible, subject to IRS deduction limits. The money then grows tax-deferred inside the account.
Distributions from a traditional SEP IRA are subject to federal income tax when withdrawn.
When Can You Access the Money?
A SEP IRA is designed for retirement, and distributions from a traditional SEP IRA are subject to federal income tax.
Once you reach age 59½, you can take distributions without the additional 10% federal tax for early distributions.
If you take money from the account before age 59½, the distribution is also subject to an additional 10% federal tax unless you qualify for an exception.
SIMPLE IRA
A SIMPLE IRA is designed for smaller employers and allows both employees and the employer to contribute.
One of its biggest attractions is exactly what the name suggests: simplicity.
Employers do not have an annual Form 5500 filing requirement, and SIMPLE IRAs avoid the nondiscrimination testing associated with traditional 401(k) plans. That can mean less administration and lower administrative costs for a small business.
For 2026, the general employee salary-reduction contribution limit is $17,000.
SECURE 2.0 provides a higher $18,100 limit for certain SIMPLE plans.
For 2026, the general SIMPLE catch-up contribution for participants age 50 or older is $4,000. Certain SIMPLE plans subject to the higher contribution structure have a $3,850 age-50 catch-up limit. Participants who turn ages 60 through 63 during the year have a higher $5,250 catch-up limit.
Employers are required to contribute to the plan each year. Under the standard SIMPLE rules, the employer generally makes either a dollar-for-dollar match of employee contributions up to 3% of compensation or a 2% nonelective contribution for eligible employees. SECURE 2.0 provides enhanced contribution provisions for certain SIMPLE plans.
Traditional or Roth?
Another important change is that SIMPLE plans can now offer Roth SIMPLE IRA contributions.
With a traditional SIMPLE contribution, the employee's salary-reduction contribution is made on a pre-tax basis for federal income-tax purposes, reducing current federal taxable income.
With a Roth SIMPLE contribution, the employee pays federal income tax on the contribution today in exchange for the opportunity to take qualified distributions tax-free later.
That creates the same fundamental planning question we've discussed with other Roth accounts:
Would you rather receive the tax benefit today or later?
What Is the Tax Advantage?
Traditional SIMPLE salary-reduction contributions reduce the employee's current federal taxable income. Employer contributions are deductible by the employer, subject to applicable tax rules, and the assets grow tax-deferred.
Traditional SIMPLE IRA distributions are taxed as ordinary income when withdrawn.
Roth SIMPLE contributions do not reduce current federal taxable income. Qualified Roth distributions are tax-free.
When Can You Access the Money?
A SIMPLE IRA is designed for retirement. Distributions from a traditional SIMPLE IRA are subject to federal income tax.
Once you reach age 59½, the 10% additional federal tax for early distributions no longer applies.
If you take a distribution before age 59½, an additional 10% federal tax applies unless an exception applies. If the early distribution occurs during the first two years of participation, that additional tax increases to 25%, unless an exception applies.
Single K
A Single K, also commonly called a Solo 401(k), Individual 401(k), or One-Participant 401(k), is another option that deserves attention, particularly for solo business owners.
It is designed for a business owner with no common-law employees, or the business owner and the owner's spouse. A one-participant plan can also cover business partners and their spouses when there are no common-law employee participants.
The feature that makes a Single K especially interesting is that the business owner can contribute in two capacities: as an employee and as the employer.
For 2026, the employee elective-deferral limit is $24,500. Participants age 50 or older can make an additional $8,000 catch-up contribution, while participants who turn ages 60 through 63 during the year have a higher $11,250 catch-up limit.
The business can also make an employer contribution. For 2026, total annual additions are limited to the lesser of 100% of compensation or $72,000, excluding applicable catch-up contributions. Special contribution calculations apply to self-employed individuals.
Why Can a Single K Be Attractive?
The employee-plus-employer contribution structure can make a significant difference, particularly at certain income levels.
Consider a simplified example of an S corporation owner with $100,000 of W-2 compensation.
With a SEP IRA, a 25% employer contribution would be $25,000.
With a Single K, that same owner could defer $24,500 as an employee and receive a $25,000 employer contribution, for a total of $49,500, assuming the plan permits those contributions and the owner has not made elective deferrals to another plan that count toward the same annual employee deferral limit.
Same business owner. Same $100,000 of W-2 compensation. Very different contribution opportunity.
A Single K can also offer:
- Traditional and Roth employee contributions
- Catch-up contributions for eligible owners
- Participant loans, if the plan permits them
- High overall contribution potential
- No annual nondiscrimination testing while the plan remains a true one-participant plan
What's the Tradeoff?
The tradeoff is additional administration.
A Single K is still a 401(k) plan and has plan-document and operational requirements.
A one-participant plan does not have to file an annual Form 5500-EZ when the total assets of that plan, combined with the employer's other one-participant plans, are $250,000 or less at the end of the plan year. Once those combined assets exceed $250,000, an annual filing is required. A final return is required for the final plan year regardless of asset size.
If the business hires employees who meet the plan's eligibility requirements, they must be included in the plan, and the no-testing advantage of a one-participant 401(k) disappears.
SEP IRA or Single K?
For a solo business owner, this is an important comparison.
A SEP IRA can be attractive to an owner who values simplicity, flexible annual contributions, and minimal administration.
A Single K can be attractive to an owner who wants the employee-plus-employer contribution structure, Roth options, catch-up contributions when eligible, the possibility of participant loans, and greater contribution ability at certain income levels.
Neither is automatically better.
The better plan is the one that accomplishes what the business owner actually needs it to accomplish.
What Is the Tax Advantage?
Traditional Single K employee deferrals reduce current federal taxable income, and employer contributions are deductible subject to applicable tax rules and limits. The assets grow tax-deferred.
A Single K can also offer a designated Roth account. Roth employee contributions are made with after-tax dollars, and qualified Roth distributions are tax-free.
When Can You Access the Money?
A Single K is designed for retirement and follows 401(k) distribution rules. The plan can allow distributions when certain events occur, including reaching age 59½, disability, death, or termination of the plan.
Distributions of traditional, pre-tax money are subject to federal income tax. Qualified distributions from the Roth portion of the account are tax-free.
Once you reach age 59½, you can take distributions without the additional 10% federal tax for early distributions, provided the plan allows the distribution.
If you take a taxable distribution before age 59½, an additional 10% federal tax applies unless you qualify for an exception.
401(k)
A 401(k) allows employees to defer part of their compensation toward retirement while giving the employer significant flexibility in how the overall plan is designed.
For 2026, the employee elective-deferral limit is $24,500. Participants age 50 or older can make an additional $8,000 catch-up contribution, while participants who turn ages 60 through 63 during the year have a higher $11,250 catch-up limit.
Employer contributions can increase the amount going into the account beyond the employee's $24,500 deferral. For 2026, total annual additions are limited to the lesser of 100% of compensation or $72,000, excluding catch-up contributions.
What Is the Tax Advantage?
Traditional 401(k) employee deferrals reduce the employee's current federal taxable income.
For example, if an employee earns $150,000 and defers $20,000 into a traditional 401(k), that $20,000 is excluded from current federal taxable income for income-tax purposes. The money is instead invested for retirement, where earnings grow tax-deferred.
Taxable distributions from a traditional 401(k) are taxed as ordinary income when withdrawn.
A 401(k) can also offer a Roth 401(k) option. Roth contributions are made with after-tax dollars, so they do not reduce current taxable income. Qualified Roth distributions, including earnings, are free from federal income tax.
If that sounds familiar, it is because the basic tax concept is similar to the Roth IRA we discussed in our previous article:
Would you rather receive your tax benefit today or later?
[Read: Traditional IRA vs. Roth IRA: Which Tax Break Is More Valuable? →]
Just remember that a Roth 401(k) is not a Roth IRA, and the contribution limits are different.
For 2026, the combined employee elective-deferral limit for traditional and Roth 401(k) contributions is $24,500, compared with the $7,500 combined annual contribution limit for Traditional and Roth IRAs. Direct Roth IRA contributions are also subject to income limits, while designated Roth 401(k) contributions are not.
An Important Change for 2026
Participants age 50 or older can contribute additional money to a 401(k) beyond the regular $24,500 employee contribution limit. This is known as a catch-up contribution.
Beginning in 2026, participants who earned more than $150,000 in wages subject to Social Security and Medicare taxes from the employer sponsoring the plan during the previous year must make their catch-up contributions on a Roth basis. This rule applies only to the additional catch-up contribution. It does not require the participant's regular 401(k) contributions to be Roth.
When Can You Access the Money?
A 401(k) can permit distributions when certain events occur, including reaching age 59½, separating from employment, disability, death, or qualifying hardship. The plan document determines which permissible distribution provisions the plan offers.
The taxable portion of a distribution taken before age 59½ is subject to the additional 10% federal tax unless an exception applies.
One important exception applies when an employee separates from service during or after the calendar year in which the employee reaches age 55. Qualifying distributions from that employer's plan are not subject to the 10% additional early-distribution tax.
Once a participant reaches age 59½, the 10% additional tax for early distributions no longer applies.
403(b)
A 403(b) provides retirement-saving opportunities for eligible organizations such as public schools, certain tax-exempt organizations, and churches.
For 2026, the employee elective-deferral limit is $24,500. Participants age 50 or older can make an additional $8,000 catch-up contribution, while participants who turn ages 60 through 63 during the year have a higher $11,250 catch-up limit.
Employer contributions can also be made. For 2026, total annual additions are limited to the lesser of $72,000 or 100% of includible compensation, excluding applicable catch-up contributions.
Certain employees with at least 15 years of service with the same qualifying organization can also be eligible for the special 403(b) 15-year catch-up if the plan permits it and IRS requirements are satisfied.
What Is the Tax Advantage?
Traditional 403(b) employee deferrals reduce the employee's current federal taxable income. The assets then grow tax-deferred.
Taxable distributions from a traditional 403(b) are taxed as ordinary income when withdrawn.
A 403(b) can also offer a Roth 403(b) option. Contributions are made with after-tax dollars and do not reduce current taxable income. Qualified Roth distributions, including earnings, are free from federal income tax.
The same Traditional-versus-Roth concepts discussed in our previous article can help explain the tax tradeoff:
[Read: Traditional IRA vs. Roth IRA: Which Tax Break Is More Valuable? →]
Again, a Roth 403(b) is not a Roth IRA. For 2026, the combined employee elective-deferral limit for traditional and Roth 403(b) contributions is $24,500, compared with the $7,500 combined annual contribution limit for Traditional and Roth IRAs. Direct Roth IRA contributions are subject to income limits, while designated Roth 403(b) contributions are not.
An Important Change for 2026
Participants age 50 or older can make catch-up contributions to a 403(b) beyond the regular employee contribution limit.
Beginning in 2026, participants who earned more than $150,000 in wages subject to Social Security and Medicare taxes from the employer sponsoring the plan during the previous year must make their catch-up contributions on a Roth basis. This requirement applies to the catch-up contribution, not the participant's regular 403(b) contribution.
When Can You Access the Money?
A 403(b) can permit distributions after certain events, including reaching age 59½, severance from employment, disability, death, or qualifying hardship. The available distribution provisions depend on the terms of the plan.
The taxable portion of a distribution taken before age 59½ is subject to the additional 10% federal tax unless an exception applies.
The age-55 separation-from-service exception can also apply to a 403(b). If the participant separates from service during or after the calendar year in which the participant reaches age 55, qualifying distributions from that employer's plan are not subject to the 10% additional early-distribution tax.
Once a participant reaches age 59½, the 10% additional tax for early distributions no longer applies.
Are There Other Exceptions to the Early-Distribution Tax?
Yes. Federal law provides a number of exceptions that allow distributions before age 59½ without the additional 10% tax when the applicable requirements are satisfied.
Depending on the type of account and the circumstances, exceptions include distributions related to death, qualifying disability, certain medical expenses, qualified birth or adoption expenses, certain substantially equal periodic payments, qualified reservist distributions, certain emergency personal expenses, domestic abuse, certain federally declared disasters, and an IRS levy.
IRA-based plans have additional exceptions, including qualifying higher-education expenses and up to $10,000 for a qualifying first-home purchase.
The exceptions are not identical for every type of retirement account.
It is also important to distinguish the early-distribution tax from regular income tax. An exception can eliminate the additional 10% tax without eliminating the ordinary federal income tax due on a taxable traditional retirement-plan distribution.
When Do Required Minimum Distributions Begin?
Tax-deferred retirement money cannot remain in these accounts indefinitely.
Under current law, the applicable RMD age is 73 for individuals born from 1951 through 1959 and 75 for individuals born in 1960 or later.
For SEP and SIMPLE IRAs, RMDs must begin at the applicable RMD age even if the account owner is still working. There is no still-working exception for these IRA-based plans.
For 401(k) and 403(b) plans, a participant can delay RMDs from the current employer's plan until retirement under the still-working exception. The exception does not apply to someone who owns more than 5% of the business sponsoring the plan.
That means the still-working exception doesn't help the owner participating in a Single K because that individual owns more than 5% of the business sponsoring the plan.
Roth IRAs and designated Roth accounts within 401(k) and 403(b) plans do not require RMDs during the original account owner's lifetime. Beneficiaries are subject to separate distribution rules after the owner's death.
Which Plan Makes Sense?
I don't believe there is a universally “best” retirement plan.
A better question is:
What do you want your plan to accomplish?
How much do you want to contribute toward your own retirement? Do you want employees to contribute? What benefits do you want the business to provide? How many employees do you have? What does your cash flow look like? Where are you in your career?
A SEP IRA can be an excellent fit for a solo business owner who wants high contribution potential, flexibility from year to year, and simple administration.
A Single K can give a solo owner the ability to contribute as both employee and employer while also providing features such as Roth contributions, catch-up contributions, and participant loans when the plan permits them.
A SIMPLE IRA can provide smaller employers with employee salary deferrals and required employer contributions without the administrative complexity of a traditional 401(k).
A 401(k) can provide greater flexibility in plan design and employer contribution strategies, particularly as a business grows.
For eligible organizations, a 403(b) can provide many of the contribution opportunities available through a 401(k), along with rules specifically designed for eligible tax-exempt and public-sector employers.
The important thing is matching the plan to the goal.
When Your Goals Change
As a business grows, income increases, retirement gets closer, or contribution goals change, additional plan designs can become worth considering.
For certain established business owners with strong, predictable cash flow who want to contribute substantially more toward retirement, a Cash Balance or Defined Benefit plan can belong in that conversation. In appropriate circumstances, these plans can also be designed alongside a 401(k).
I've written separately about these strategies and the planning opportunities they can provide for business owners who qualify.
[Read: The Plan Is Only the Beginning →]
Let's Build a Plan Together
This article is intended to give you an overview of several types of retirement accounts and plans that can be established for a business or organization. The details and planning considerations for each extend well beyond what we can cover in a single article.
My hope is that this gives you a better understanding of the options available and gets you thinking about what you actually want your retirement plan to accomplish.
That's where the more important conversation begins.
We would love the opportunity to learn more about your business, your employees, your retirement goals, and what you want your plan to accomplish. From there, we can help you evaluate the options and determine which type of plan best fits your goals.
Important Reminder
This article is provided for informational and educational purposes only and should not be considered individualized investment, tax, or legal advice. Retirement plan eligibility, contributions, deductions, distributions, plan design, testing requirements, and tax consequences depend on the type of plan and individual circumstances. Tax laws, contribution limits, and IRS rules are subject to change. Early-distribution tax exceptions have specific eligibility requirements, and plan documents can restrict when distributions are available. Please consult your financial professional, tax advisor, attorney, and retirement plan professionals, as appropriate, before establishing, modifying, or taking a distribution from a retirement plan.