Key Takeaways
- SEP-IRA allows employer contributions up to 25% of compensation or $70,000 (2025), with 3-of-5 year eligibility and establishment by tax filing deadline
- SIMPLE IRA permits $16,500 employee deferrals (2025) plus 3% match or 2% non-elective employer contribution; limited to employers with 100 or fewer employees
- Solo 401(k) maximizes contributions for self-employed: $23,500 employee deferral + 25% employer contribution up to $70,000 (2025)
- 403(b) plans serve tax-exempt organizations and public schools with similar contribution limits to 401(k) plus special 15-year catch-up
- 457(b) plans offer government employees unique double-deferral opportunities with standard employer plans
Retirement Plan Selection for Businesses
Selecting the right retirement plan is one of the most important decisions a business owner makes. The optimal choice depends on factors including business size, cash flow predictability, desired contribution flexibility, and whether the goal is to maximize owner benefits or provide broad employee coverage. This section examines the major plan types available to businesses and provides a framework for making the right selection.
SEP-IRA: Simplified Employee Pension
The Simplified Employee Pension (SEP-IRA) is the easiest retirement plan to establish and maintain, making it popular among small businesses and self-employed individuals.
2025 SEP-IRA Contribution Limits
| Parameter | 2025 Limit |
|---|---|
| Maximum contribution | Lesser of 25% of compensation or $70,000 |
| Compensation cap | $350,000 |
| Self-employed contribution | Approximately 20% of net self-employment income |
Key SEP-IRA Features
Employer-only contributions: Only the employer contributes to a SEP-IRA. Employees cannot make elective deferrals, which simplifies administration but limits employee participation.
3-of-5 eligibility rule: Employees must be covered if they:
- Are at least 21 years old
- Have worked for the employer in 3 of the past 5 years
- Received at least $750 in compensation during the year (2025)
Flexible and discretionary: Employers can vary contribution amounts year-to-year, contributing 0% to 25% based on business performance. However, all eligible employees must receive the same percentage.
Late establishment: A SEP can be established and funded by the employer's tax filing deadline, including extensions. This is unique among retirement plans and allows retroactive planning.
Immediate 100% vesting: All contributions are immediately and fully vested to employees.
SEP-IRA Advantages and Disadvantages
| Advantages | Disadvantages |
|---|---|
| Simplest to establish and administer | No employee deferral option |
| Lowest administrative costs | Must cover all eligible employees equally |
| Flexible annual contributions | Cannot skew benefits to owners |
| Can establish after year-end | Early withdrawal penalties apply (10%) |
SIMPLE IRA: Savings Incentive Match Plan for Employees
The SIMPLE IRA bridges the gap between SEP-IRAs and traditional 401(k) plans, offering employee deferral contributions with simpler administration than a 401(k).
2025 SIMPLE IRA Contribution Limits
| Contribution Type | Standard Limit | Small Employer (<=25 employees) |
|---|---|---|
| Employee deferral (under 50) | $16,500 | $17,600 |
| Catch-up (age 50-59 or 64+) | $3,500 | $3,850 |
| Super catch-up (age 60-63) | $5,250 | $5,250 |
| Maximum employee contribution (age 60-63) | $21,750 | $22,850 |
Employer Contribution Requirements
Employers must choose ONE of these contribution formulas each year:
Option 1: Matching contribution
- Match 100% of employee deferrals up to 3% of compensation
- Can reduce to 1% match in 2 of any 5 years
Option 2: Non-elective contribution
- Contribute 2% of compensation to ALL eligible employees
- Made regardless of whether employee defers
SIMPLE IRA Eligibility and Restrictions
Employee eligibility:
- Earned at least $5,000 in any 2 preceding years
- Reasonably expected to earn $5,000 in current year
Employer eligibility:
- 100 or fewer employees earning $5,000+ in preceding year
- Cannot maintain another qualified plan simultaneously
25% early withdrawal penalty: Withdrawals within the first 2 years of participation are subject to a 25% penalty (instead of the usual 10%). After 2 years, the standard 10% penalty applies.
SIMPLE IRA Advantages and Disadvantages
| Advantages | Disadvantages |
|---|---|
| Employee deferral contributions allowed | 100-employee limit |
| Lower administrative costs than 401(k) | Mandatory employer contributions |
| No discrimination testing required | Lower contribution limits than 401(k) |
| 100% immediate vesting | 25% penalty for early withdrawals in first 2 years |
Solo 401(k): Maximizing Self-Employed Retirement Savings
The Solo 401(k) (also called Individual 401(k) or Self-Employed 401(k)) allows self-employed individuals and business owners with no full-time employees (except a spouse) to maximize retirement contributions.
2025 Solo 401(k) Contribution Limits
| Contribution Type | 2025 Limit |
|---|---|
| Employee deferral (under 50) | $23,500 |
| Employee deferral (age 50-59 or 64+) | $31,000 |
| Employee deferral (age 60-63) | $34,750 |
| Employer contribution | Up to 25% of compensation |
| Total annual limit (under 50) | $70,000 |
| Total annual limit (50+) | $77,500 |
Dual Contribution Advantage
The Solo 401(k)'s power comes from combining roles:
As employee: Defer up to $23,500 (2025) of compensation As employer: Contribute up to 25% of compensation
Example: A self-employed consultant with $100,000 net income:
- Employee deferral: $23,500
- Employer contribution: $20,000 (20% of net self-employment income)
- Total: $43,500
Solo 401(k) Features
- Loan provisions: Can borrow up to $50,000 or 50% of vested balance
- Roth option: Many plans offer Roth 401(k) contributions
- Spouse participation: Working spouse can also contribute
- No discrimination testing: Owner-only plans exempt from ADP/ACP tests
403(b) Plans: Tax-Exempt Organizations
403(b) plans (Tax-Sheltered Annuities or TSAs) are available to:
- Public school employees
- Employees of 501(c)(3) tax-exempt organizations
- Certain ministers
2025 403(b) Contribution Limits
| Contribution Type | 2025 Limit |
|---|---|
| Employee deferral (under 50) | $23,500 |
| Standard catch-up (age 50+) | $7,500 |
| Super catch-up (age 60-63) | $11,250 |
| 15-year catch-up (HER organizations) | Up to $3,000/year |
| Total annual addition limit | $70,000 |
15-Year Catch-Up Rule
Employees of Health, Education, and Religious (HER) organizations with 15+ years of service may contribute an additional $3,000 per year, up to a $15,000 lifetime maximum. This is in addition to age-50 catch-ups.
Maximum 403(b) deferral (age 60-63 with 15-year catch-up): $23,500 + $11,250 + $3,000 = $37,750
403(b) Investment Options
- Annuity contracts from insurance companies
- Mutual funds held in custodial accounts
- Collective investment trusts (added by SECURE 2.0)
457(b) Plans: Government and Tax-Exempt Employers
457(b) plans are deferred compensation arrangements for:
- State and local government employees
- Employees of tax-exempt organizations (limited participation)
2025 457(b) Contribution Limits
| Contribution Type | 2025 Limit |
|---|---|
| Employee deferral (under 50) | $23,500 |
| Standard catch-up (50+) - Governmental only | $7,500 |
| Final 3-year catch-up | Up to $23,500 additional |
| Maximum in final 3 years | $47,000 |
Double-Deferral Opportunity
Government employees with both a 457(b) and a 401(k) or 403(b) can defer to BOTH plans:
- 457(b): $23,500
- 401(k) or 403(b): $23,500
- Total: $47,000 (before catch-ups)
Governmental vs. Tax-Exempt 457(b)
| Feature | Governmental | Tax-Exempt 501(c) |
|---|---|---|
| Asset protection | Protected in trust | Subject to employer creditors |
| Rollovers | To IRA, 401(k), 403(b) | Only to other 457(b) |
| Age-50 catch-up | Yes | No |
| Eligible employees | All employees | Top-hat group only |
Plan Selection Decision Framework
Factors to Consider
Business size and workforce:
- Solo practitioner with no employees: Solo 401(k)
- Small business with 1-5 employees: SEP or SIMPLE
- Growing business planning to hire: SIMPLE or 401(k)
- 100+ employees: Traditional 401(k)
Cash flow and contribution flexibility:
- Variable profits: SEP-IRA (0-25% flexibility)
- Stable income: SIMPLE or 401(k)
- Maximize owner contributions: Solo 401(k)
Administrative capacity:
- Minimal administration: SEP-IRA
- Moderate administration: SIMPLE IRA
- Full-service capabilities: 401(k)
Quick Comparison Chart
| Feature | SEP-IRA | SIMPLE IRA | Solo 401(k) | 403(b) | 457(b) |
|---|---|---|---|---|---|
| Max contribution (2025) | $70,000 | $21,750 | $70,000 | $70,000 | $47,000 |
| Employee deferrals | No | Yes | Yes | Yes | Yes |
| Employer required contrib | No | Yes | No | Varies | No |
| Loan provision | No | No | Yes | Yes | Yes |
| Max employees | Unlimited | 100 | 0 (or spouse) | Varies | Varies |
| Filing requirements | None | None | Form 5500-EZ (over $250K) | Yes | Yes |
On the CFP Exam
Expect questions testing your ability to:
- Match appropriate plan types to business scenarios
- Calculate maximum contributions under different plans
- Identify eligibility requirements (3-of-5 for SEP, $5,000 for SIMPLE)
- Distinguish between employer and employee contribution types
- Recognize special catch-up provisions (15-year, super catch-up, final 3-year)
A self-employed consultant age 52 with $200,000 net self-employment income wants to maximize retirement contributions. Which plan offers the highest potential contribution for 2025?
An employer with 75 employees wants to establish a retirement plan with minimal administration and no required annual contributions. Which plan best fits these requirements?
A new employee joins a company with a SEP-IRA plan on January 15, 2025. She is 25 years old, worked for the company during summers in 2021, 2023, and 2024, and will earn $60,000 in 2025. When must she be included in the SEP-IRA?