Solo 401(k) vs SEP vs Defined Benefit Plan
Which is Right For Your Business
Sean Williams
For many high-earning business owners, a SEP IRA is like the vanilla ice cream of retirement plans.
It’s fine. It’s simple. It gets the job done.
But if you’re making good money, you could be leaving five to six figures in tax deferrals on the table every year.
Let’s talk about why your SEP might be holding you back—and what other tools are out there to supercharge your tax savings.
Why This Matters
When you’re earning $200k, $500k, even $1M+ a year, the name of the game isn’t just saving for retirement.
It’s reducing taxable income in a way that works with your business structure, cash flow, and exit plan.
The three big contenders for high-income business owners:
- Solo 401(k)
- SEP IRA
- Defined Benefit Plan
1. Solo 401(k) — The Flexible Heavyweight
Think of the Solo 401(k) as the Swiss Army knife of retirement plans.
It allows both employee and employer contributions, which means you can put away more at lower income levels than a SEP.
- 2025 Max Contribution: $69,000 (plus $7,500 if 50+), combining employee + employer contributions.
- Employee deferral limit: $23,000 (pre-tax or Roth).
- Employer profit share: Up to 25% of W-2 wages (20% if self-employed), with a max contribution of $46,000.
Best for:
- Business owners with high income but lower W-2 wages.
- Anyone who wants Roth contributions.
- Those who want loan access to their retirement plan.
- Looking for strategies to lower taxes and max out QBID (Qualified Business Income Deduction)
Tax Savings Potential:
Max funding can reduce taxable income by $50k–$60k, depending on your structure.
2. SEP IRA — The Easy, No-Frills Option
The SEP IRA is simple to set up and maintain. But it has one big drawback: it only allows employer contributions.
- 2025 Max Contribution: 25% of W-2 wages (20% of net SE income), capped at $69,000.
- No Roth option and no employee deferral.
- Contributions must be the same percentage of pay for all eligible employees (yes, even the guy who takes every Friday off).
Best for:
- Solo business owners with very high net income and no employees.
- Those who want ultra-simple administration.
Tax Savings Potential:
Good for high earners, but misses opportunities for catch-up contributions and front-loading savings in lower-income years.
3. Defined Benefit Plan — The Tax-Saving Monster
This is where things get serious.
A Defined Benefit Plan (DBP) is like a retirement plan on steroids for high earners—especially those closer to retirement age.
- 2025 Max Contribution: Often $100k–$300k+ annually, depending on age, income, and desired benefit.
- Contributions are based on an actuarial formula, not a simple percentage.
- Can be combined with a 401(k) for even more savings.
Best for:
- High-income business owners (often 45+) who want to slam the tax bill down hard.
- Those who can commit to steady contributions for at least 3–5 years.
Tax Savings Potential:
Six figures in deductions per year—and possibly a dramatically smaller quarterly tax payment.
The Bottom Line
If you’re making serious money and your tax strategy is “just max the SEP,” you’re probably overpaying the IRS.
- A Solo 401(k) can beat a SEP on contribution limits when wages are moderate.
- A Defined Benefit Plan can blow both out of the water for high earners ready to make large annual contributions.
- And sometimes, the real magic happens by combining plans.
Here’s a chart that compares all of the features of each:
| Feature | Solo 401(k) | SEP IRA | Defined Benefit Plan |
|---|---|---|---|
| Max Contribution (2025) | Up to $69,000 (plus $7,500 catch-up if 50+) | Up to $69,000 | Often $100,000–$300,000+ |
| Contribution Type | Employee deferral + employer profit share | Employer contribution only | Employer contribution (actuarial formula) |
| Roth Option | ✅ Yes (employee deferral only) | ❌ No | ❌ No |
| Catch-Up Contributions (50+) | ✅ Yes | ❌ No | ❌ No |
| Best For | High earners with moderate W-2 wages, want flexibility | Very high earners with no employees, want simplicity | High earners (often 45+) wanting massive deductions |
| Employee Eligibility Rules | No required match, but must include eligible employees if not solo | Same % of comp for all eligible employees | Must cover eligible employees |
| Setup Deadline | December 31 | Tax filing deadline (incl. extensions) | Typically by year-end; actuarial setup required |
| Administration Complexity | Low to moderate (Form 5500 after $250k assets) | Low | High (annual actuarial certification) |
| Tax Savings Potential | $50k–$60k+ | $50k–$60k+ | $100k–$150k+ or more |
| Plan Loans Allowed? | ✅ Yes | ❌ No | ❌ No |
| Combine with Other Plans? | ✅ Yes | ✅ Sometimes | ✅ Yes |
💬 Pro Tip: Don’t pick a plan just because your buddy at the golf course uses it. The “right” choice depends on your entity type, income structure, and how much you actually want to keep instead of sending to Uncle Sam.
FAQ: Solo 401(k) vs SEP IRA vs Defined Benefit Plan
Q: If I already have a SEP IRA, can I switch to a Solo 401(k) or Defined Benefit Plan?
A: Yes, but timing matters. You can generally set up a Solo 401(k) until year-end, while a Defined Benefit Plan may need to be in place earlier. You’ll also want to coordinate rollovers carefully.
Q: Can I have more than one retirement plan?
A: Yes. Many high-income owners pair a Defined Benefit Plan with a Solo 401(k) to maximize deductions.
Q: What’s the downside of a Defined Benefit Plan?
A: Commitment. You’re agreeing to make sizable annual contributions, even if business dips. It’s powerful, but not for unpredictable cash flow.
Q: Are Roth contributions available in all three plans?
A: Only the Solo 401(k) offers a Roth option. SEP IRAs and Defined Benefit Plans are pre-tax only.
Q: How much can I really save in taxes?
A: That depends on your income and plan type, but it’s common for high earners to cut $50k–$150k+ off their taxable income with the right structure.
Q: Do employees affect the plan I choose?
A: Yes. If you have employees, contribution rules change—especially for SEPs, which require equal contribution percentages for all eligible staff.
📅 Ready to see which plan gives you the biggest tax win this year?
📅Book a free 30-minute call and let’s build your plan.
Disclaimer: This blog post is for informational purposes only and does not constitute financial advice. Please consult with a financial advisor to determine the best strategy for your individual needs.
