SEP IRA vs. Solo 401(k) vs. Cash Balance Plan: Which Retirement Plan Fits Your Business

Most Utah business owners we meet are saving for retirement in one of two ways: a SEP IRA their CPA set up years ago, or nothing at all because the business is the retirement plan. Both can work. Both can also leave a lot of tax savings on the table. Three plans do most of the work for owners, and choosing between them comes down to profit, payroll and patience.

The SEP IRA: simple, flexible, limited

A Simplified Employee Pension lets the business contribute up to 25 percent of compensation for each eligible employee, including you, up to an annual cap. For 2026 that cap is $72,000, and the compensation that counts is capped at $360,000. There is no employee deferral; every dollar is an employer contribution.

What owners like about it: setup takes an afternoon, there is no annual filing, and you decide each year whether to contribute at all. A slow year can be a zero year.

What catches owners off guard: the percentage you give yourself must be the same percentage you give every eligible employee. If you have three staff and want to put 20 percent of your own pay away, you are putting 20 percent of their pay away too. For a solo consultant that is irrelevant. For a shop with a payroll it changes the math quickly.

The Solo 401(k): more room at the same income

A Solo 401(k), sometimes called an individual 401(k), is for a business with no employees other than the owner and a spouse. It lets you contribute two ways. As the employee, you can defer up to $24,500 for 2026, plus a catch-up of $8,000 if you are 50 or older (a higher catch-up applies at ages 60 through 63). As the employer, the business can add up to 25 percent of compensation. The combined total is capped at $72,000 for 2026 before catch-ups.

Because of the employee deferral, a Solo 401(k) nearly always beats a SEP at the same income level. A hypothetical owner paying herself $100,000 could put roughly $25,000 into a SEP. In a Solo 401(k) she could defer $24,500 as the employee and add about $25,000 as the employer, close to double.

Other advantages: a Roth option for the deferral portion, the ability to borrow from the plan, and a way to add a spouse who works in the business. The trade-offs are a little more paperwork and an annual Form 5500-EZ once the plan passes $250,000 in assets. Hire a full-time employee and the plan has to open to them, which is when many owners move to a standard 401(k).

The cash balance plan: the heavy lifter

A cash balance plan is a type of defined benefit plan. Instead of a contribution limit, it has a benefit target, and an actuary calculates how much the business must contribute each year to fund it. For owners in their 50s and 60s with strong, steady profits, the required contribution can run well into six figures per year, on top of a 401(k).

For a high-income owner a decade from exit, that means moving a large share of profit out of this year’s tax bill and into a retirement account. We often see it paired with a 401(k) so the owner gets both.

The costs are real. Contributions are required each year, not optional, so you need predictable cash flow. You will pay for an actuary and annual administration. Employees must generally be included, and the plan has to pass nondiscrimination testing. It is a commitment of several years, not a one-off.

How we help a client choose

The choice usually comes down to four questions, and they are the same questions we ask in step two of our process, Take Inventory.

• How much profit is reliably available after you pay yourself what you need?
• Do you have employees, and do you want to cover them as a retention tool or keep it owner-only?
• How many years until you plan to sell or step back? A cash balance plan wants a runway.
• How much do you value flexibility? A SEP can be skipped in a bad year. A cash balance plan cannot.

A common path looks like this: SEP in the early years, Solo 401(k) once income is steady, a standard 401(k) when the first employee arrives, and a cash balance plan layered on top in the final high-earning decade. Nobody has to start at the end.

Deadlines matter

A Solo 401(k) must generally be established by the end of the tax year to make employee deferrals for that year, though recent law changes allow a sole proprietor some extra time for the first year. A SEP can be opened and funded up to your tax filing deadline, including extensions. A cash balance plan needs to be adopted before year-end and funded by the time the return is filed. If you are reading this in the fourth quarter, call your CPA and your advisor now, not in March.

One piece of a bigger plan

A retirement plan is one piece of the business owner planning we do. It sits alongside the buy-sell agreement, the cash reserve, the exit plan and the question of what you will actually do with your time when the business is no longer yours. Our article on retirement savings for business owners covers the habits that make any of these plans work.

Frequently asked questions

Written by Samuel Preine, Wealth Advisor, RJFS. Last reviewed: October 28, 2026.