Choosing between a SEP IRA, a solo 401(k), and a defined benefit plan comes down to one question before any other: how many employees do you have? John Shedenhelm’s team sorts every business owner into a plan type by headcount first, then refines from there based on income and savings goals.
Why Headcount Comes Before Any Other Factor
Every one of these plans has a rule about who else at your business must be included, and that rule changes the math completely. A plan that’s simple and cheap for a business of one can become the most expensive option on the table once you add employees.
Did You Know? A SEP IRA requires the same contribution percentage for every eligible employee that you give yourself. If you contribute 20% of your own pay, you must contribute 20% of pay for every eligible employee too.
SEP IRA: Best for Zero or Very Few Employees
A SEP IRA (Simplified Employee Pension) is the easiest plan to set up and maintain. There’s no annual filing requirement in most cases, and contributions are flexible year to year.
For 2026, you can contribute up to 25% of compensation, with a maximum of $72,000. The catch is the equal-percentage rule. Once you add even one or two eligible employees, you’re funding their retirement at the same rate as your own, which can turn a SEP into your most expensive plan surprisingly fast.
Pro Tip: Run the math at exactly eight employees before choosing a SEP. That’s the headcount where, in most fee structures we’ve reviewed, the mandatory equal contributions across your team start to outweigh the plan’s simplicity, and a 401(k) with vesting schedules usually becomes cheaper.
Solo 401(k): Best for Owner-Only Businesses Wanting Higher Savings
A solo 401(k) works only if you have no employees other than a spouse. It allows two layers of contribution: an employee deferral of up to $24,500 in 2026 (plus a $8,000 catch-up if you’re 50 or older, or $11,250 if you’re 60 to 63), and an employer contribution of up to 25% of compensation. Combined, the total cannot exceed $72,000 for 2026 (higher with catch-up contributions).
This structure often lets an owner save more than a SEP IRA at the same income level, since the employee deferral doesn’t count against the 25% employer limit the way SEP contributions do.
Defined Benefit Plan: Best for High Income and a Short Runway to Retirement
A defined benefit plan works like a traditional pension. It promises a specific retirement benefit, and the contribution required to fund that benefit is calculated actuarially every year.
For high-earning owners in their 50s or older with only a handful of years until retirement, this can allow contributions well beyond the $72,000 cap on defined contribution plans, sometimes into six figures annually. The 2026 limit on the annual benefit a defined benefit plan can promise is $290,000.
The tradeoff is complexity and cost. These plans require an actuary, ongoing administration, and a real commitment to funding them consistently.
Side-by-Side Comparison
| Plan Type | Best For | 2026 Contribution Limit | Employee Requirement |
|---|---|---|---|
| SEP IRA | Solo owners or very small teams | Up to 25% of pay, max $72,000 | Equal % for all eligible employees |
| Solo 401(k) | Owner-only businesses | Up to $72,000 (employee + employer combined) | Owner and spouse only |
| Defined Benefit | High earners near retirement | Actuarially calculated, often six figures | Can require employee coverage too |
The Compensation Floor That Trips People Up
A detail many owners miss: to even be eligible for SEP contributions in 2026, an employee generally needs to have earned at least $800 from your business during the year. It’s a small number, but it determines who counts as “eligible” when you’re running the equal-percentage math.
Did You Know? SEP contributions also count against the overall compensation limit used for retirement plan purposes, which is $360,000 for 2026. Compensation above that amount doesn’t factor into the contribution formula.
What Happens When Your Headcount Changes
Plan choice isn’t a one-time decision. A business that starts as a true solo operation often adds its first employee within a few years, and that single change can flip the math on which plan makes sense.
If you set up a SEP IRA as a solo owner and then hire your first full-time employee, you’re now required to make the same percentage contribution for that employee that you make for yourself. Depending on their salary and how much you were contributing for yourself, that can turn a modest tax benefit into a real, ongoing payroll cost.
Pro Tip: Review your retirement plan choice any time your headcount changes, not just once when the business is new. A plan that made sense at zero employees can become the most expensive option on the table at three or four, and switching plans mid-year has its own rules and deadlines worth planning around in advance.
Matching the Plan to Your Actual Goal
Headcount narrows the field, but the final choice depends on what you’re actually trying to do.
If your goal is simplicity and you’re a true solo operator, a SEP IRA gets you a meaningful tax deduction without much paperwork. If your goal is maximizing your own savings rate as an owner-only business, a solo 401(k) usually wins on flexibility and total contribution potential. If your goal is catching up fast because retirement is close and income is high, a defined benefit plan can move far more money into tax-deferred savings than either of the other two, at the cost of ongoing administrative commitment.
This is a decision worth revisiting anytime your headcount changes, not just when you first set up a plan. John Shedenhelm and the team at Eagle Financial Solutions review this fit annually for business-owner clients alongside the broader financial planning work that separates personal and business wealth.
Picking the wrong retirement plan structure doesn’t just cost you a tax deduction, it can lock you into funding obligations for employees you didn’t intend to include. Talk with Eagle Financial Solutions about which plan fits your current headcount and income before your next plan year begins.
FAQ
What is the best retirement plan for a small business with no employees? A solo 401(k) is usually the best option for a business with no employees besides a spouse, since it allows higher combined contributions than a SEP IRA at the same income level. A SEP IRA is a simpler alternative if you want minimal paperwork.
How many employees can you have with a SEP IRA? There’s no cap on employee count for a SEP IRA, but every eligible employee must receive the same contribution percentage you give yourself. This can make a SEP costly once you have several employees.
What is a defined benefit plan for small business owners? A defined benefit plan is a pension-style retirement plan that promises a set benefit at retirement, with contributions calculated by an actuary each year. It allows much higher contributions than a SEP IRA or solo 401(k), making it useful for high earners with limited years left to save.
Can I contribute to both a SEP IRA and a solo 401(k)? Generally no, if the SEP IRA and solo 401(k) cover the same self-employment income, since both use the same overall annual contribution limit. A business owner typically chooses one structure rather than combining them for the same income.
