SEP-IRA, SIMPLE IRA, 401(k), defined benefit: small-business retirement plans read like alphabet soup, but the choice is mostly a function of two things. How much do you want to be able to contribute, and how much administrative work will you tolerate? SEP-IRA is the simplest, SIMPLE IRA lets employees contribute, a 401(k) has the highest standard limits, and a defined benefit plan allows the largest deductions in exchange for the most paperwork.

Retirement Plan Options for Small Businesses

You can set up a strong retirement plan for yourself and your employees even without an HR department. Here is how the four main options compare.

SEP-IRA

A SEP-IRA (Simplified Employee Pension) is built for the self-employed, freelancers, and small business owners with or without employees. It is easy to open and maintain, contributions are tax-deductible, and the money grows tax-deferred until you withdraw it and pay ordinary income tax. Only the employer contributes; employees cannot defer their own pay into a SEP.

Designed for: Self-employed individuals and small business owners. If you have employees, you must contribute the same percentage of compensation for every eligible one.

Employee eligibility: At least 21 years old, worked for the business in at least three of the last five years, and earned at least $800 in 2026.

2026 contribution limit: The lesser of 25% of compensation or $72,000 (up from $70,000 in 2025). For a self-employed person, the effective rate works out to about 20% of net self-employment income.

Benefits: High limits, simple setup, and contributions vest immediately.

Drawbacks: No catch-up contributions for people 50 and older. RMDs start at age 73 (75 for those born in 1960 or later).

Withdrawal rules: You can withdraw any time, but a withdrawal before age 59 1/2 carries a 10% penalty unless an exception applies:

• Account holder’s death
• Disability
• Qualified higher education expenses
• Up to $10,000 for a first home
• Qualified medical expenses above a threshold
• Health insurance premiums during unemployment
• Military reservist called to active duty

An exception waives the penalty, not the income tax.

SIMPLE IRA

A SIMPLE IRA (Savings Incentive Match Plan for Employees) is for self-employed people and businesses with 100 or fewer employees. It is inexpensive to run, needs only an initial plan document and annual employee notices, and can be opened at custodians such as Fidelity, Charles Schwab, or Vanguard. Employer contributions are tax-deductible, and unlike a SEP, employees can defer their own pay.

Employer eligibility: 100 or fewer employees.

Employee eligibility: Earned at least $5,000 in any two prior years and expected to earn at least $5,000 this year.

2026 contribution limits: Employees can defer up to $17,000, with a $4,000 catch-up at 50 or older, or a $5,250 catch-up for ages 60 to 63. Businesses with 25 or fewer employees (and larger ones that boost their match) can use a higher limit of $18,100, with a $3,850 catch-up. All figures rose from 2025 ($16,500 standard, $17,600 higher).

Benefits: Easy setup, immediate vesting, and a tax credit for adding automatic enrollment.

Drawbacks: Lower limits than a 401(k), and capped at 100 employees.

Withdrawal rules: Contributions go in pre-tax and distributions are taxed as ordinary income; a withdrawal before 59 1/2 triggers the 10% penalty unless an exception applies. One SIMPLE-specific trap: withdrawals taken in the first two years of participation face a 25% penalty instead of 10%. RMDs begin at 73. A Roth SIMPLE IRA, now allowed, reverses the tax treatment: taxed going in, tax-free qualified withdrawals.

401(k)

A 401(k) offers the most flexibility and the highest standard contribution limits, at the cost of more setup and higher fees than a SEP or SIMPLE. Standing one up generally means creating a trust to hold plan assets, drafting a plan document (eligibility, matching formula, vesting), and distributing plan details to employees.

A business with more than 100 employees will usually need a 401(k) rather than a SIMPLE. Beyond setup, there are no eligibility requirements to sponsor one other than having a business.

2026 contribution limits: Employee deferral up to $24,500, with an $8,000 catch-up at 50 or older, or $11,250 for ages 60 to 63. The combined employer-plus-employee limit is $72,000 (up from $23,500 and $70,000 in 2025). A solo 401(k) applies the same limits to an owner-only business.

Benefits: High limits, optional employer match, and loans are permitted.

Drawbacks: Higher administrative cost, and nondiscrimination testing to keep the plan fair across pay levels.

Withdrawal rules: The 10% early-withdrawal penalty applies before 59 1/2 unless an exception is met, and RMDs start at 73. If a plan allows loans and an employee leaves with a balance outstanding, the unpaid amount is usually due quickly or treated as a taxable distribution.

Defined-benefit plans

A defined benefit plan, or pension, promises a fixed retirement benefit set by a formula rather than by investment performance. Most have been replaced by 401(k)s, but they remain the tool for an older, high-income owner who wants to contribute far more than a 401(k) allows.

There is no single formula. Plans typically weigh tenure, salary (often an average of the highest three or six years), and age, or pay a flat amount such as $500 for each year of service. Usually only the employer funds the plan, and the employer sets eligibility and vesting.

There is no fixed contribution limit, but there is a cap on the benefit the plan can pay: for 2026, the annual benefit cannot exceed the lesser of 100% of the participant’s average compensation over their three highest consecutive years or $290,000 (up from $280,000 in 2025). Required annual contributions are actuarially determined and can be very large, which is what drives the deduction.

Benefits: Large, sometimes six-figure, deductible contributions, and a benefit package that helps attract and keep senior talent.

Drawbacks:

• The employer is fully on the hook for the promised payout, regardless of investment returns.
• Setup filings, annual filings, and annual actuarial work make it the most expensive plan to run.
• The IRS expects the plan to be permanent. There is no strict statutory rule requiring a set number of years of contributions, but terminating the plan early without a valid business reason can put its tax-qualified status at risk retroactively.

Withdrawal rules: Each plan sets its own terms, usually starting at a normal retirement age of 62 or later, and some allow a lump sum instead of monthly payments.

Which Retirement option is best for small businesses?

If you have fewer than 100 employees, start by looking at the SEP-IRA and SIMPLE IRA, since both are cheap and quick to set up. A few decision points:

• Highest standard contribution limits: 401(k)
• Biggest possible tax deduction, older high-income owner: Defined benefit plan
• Up and running in about a week: SEP-IRA
• Fewer than 100 employees and you want employees to contribute: SIMPLE IRA
• Attract talent with a standout benefit: Defined benefit plan

Why set up a retirement plan for your small business?

Because no HR department is doing it for you. To retire from your own business, you need a plan you fund yourself, and offering one to employees helps you attract and keep them. The contributions you make to employees’ accounts are tax-deductible up to the plan’s limits, and how much you should save still comes back to the same 15%-of-income starting point that applies to everyone else.

Other options for the self-employed

Beyond the plans above, a self-employed person can also use:

• Solo 401(k): For an owner-only business (a spouse on payroll is allowed). Same limits as a regular 401(k), minimal testing.
• Traditional IRA: Opens in minutes; tax-deferred contributions subject to the standard IRA limit ($7,500 for 2026, $8,600 at 50+).
• Roth IRA: Same limit, taxed now for tax-free withdrawals later, subject to income limits.
• Because the right structure affects your taxes for years, it is worth reviewing with an accountant, and an advisor can help weigh a plan for the business against your personal retirement plan.

Frequently Asked Questions

How much should I save for retirement?

A common target is 15% of your income each year, adjusted for your own plans: where you want to live, how much you want to travel, and any health considerations. As a business owner without an employer match, you may need to carry the full 15% yourself, and more is better given that self-employment income can be uneven.

How do I set up a business retirement plan?

For a SEP or SIMPLE IRA, open the plan directly at a custodian such as Charles Schwab, Fidelity, or Vanguard; setup takes a few days and minimal paperwork. For a 401(k) or defined benefit plan, you will work with a plan provider or third-party administrator. In all cases, talk to your accountant first to make sure the plan fits your tax situation and you are capturing the deductions.

Can you start a retirement fund on your own?

Yes. A SEP-IRA, SIMPLE IRA, or personal IRA can be opened on your own in a few days. More complex plans, a 401(k) or a defined benefit plan, or any plan covering multiple employees, are best set up with an advisor and accountant because of the paperwork and testing involved.

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