SEPs, SIMPLEs, and Solo 401(k)s
Which plan is the right plan for Sam's tax strategy?
Sam's plan has a number to reach.
To restore his Qualified Business Income (QBI) Deduction in full, Sam needs the power of a Qualified Retirement Plan that can reach $72,000 in pre-tax retirement-plan contributions. With $200,000 of W-2 compensation, not every plan can do this. Let's examine his options to find the best plan for him.
SEP IRA
Maximum for Sam$50,000- Employer contribution25% × $200,000
- $50,000
- Employee contributionNot available
- $0
- Catch-up contributionNot available
- $0
SIMPLE IRA
Maximum for Sam$33,250- Employee deferral2026 enhanced limit
- $18,100
- Employer match3% × $200,000
- $6,000
- Additional employer2026 nonelective limit
- $5,300
- Age-50 catch-upAbove the regular limit
- $3,850
Solo 401(k)
Maximum for Sam$80,000- Employee deferral2026 elective limit
- $24,500
- Employer contributionFits within the core limit
- $47,500
- Core contributionAmount used in the strategy
- $72,000
- Age-50 catch-upAvailable above the core limit
- +$8,000
The SIMPLE illustration assumes the enhanced limits available to Sam's owner-only business and includes his age-50 catch-up. The Solo 401(k) reaches the target with $72,000 of core contributions; its additional $8,000 catch-up is available above that amount and is not used in the modeled tax result.
The Solo 401(k) Has the Power he Needed
The Solo 401(k) was the only plan with enough contribution capacity to reach Sam's $72,000 target. The SEP IRA stopped at $50,000, while the SIMPLE IRA reached only $33,250. By combining employee and employer contributions, the Solo 401(k) could pull off the strategy neither alternative could.
The Solo 401(k) Also Has the Flexibility with its Cash
All three plans hold retirement money, but they do not give Sam the same path to access it while the plan is active.
SEP IRA + SIMPLE IRA
Plan WithdrawalsTaxed as Ordinary IncomePre-tax dollars come out as a distribution, and an early-withdrawal tax may also apply.
Solo 401(k)
Plan LoansUp to $50,000Sam can borrow without an immediate taxable distribution when the plan and repayment rules are followed.
Plan loans must be permitted by the plan and are generally limited to the lesser of $50,000 or 50% of the vested account balance.
The right plan depends on you.
Sam's conclusion followed from the choices already made in his tax strategy. His plan needed to work with these specific facts:
- Entity
- S Corporation
- W-2 Compensation
- $200,000
- Pre-Tax Target
- $72,000
- Workforce
- Owner Only
If your situation is like that of Sam's, then the Solo 401(k) is worth considering. However, if your circumstances are different, then the right plan for you will likely differ. For those who choose to keep the simplicity of a Sole Proprietorship, but remain an Owner Only setup, a SEP IRA is worth considering. For those with employees, a SIMPLE IRA is worth considering. It all depends on you.
That's why it's important to have a team of experts working for you. We at Lorio Wealth Management can help, and we want to be a part of your team, working with your Tax Advisor, to form strategies based on your individual circumstances.
Details behind the illustration
Methodology & Limits
- The $9,245 and $24,826 tax-reduction figures in the series navigator carry forward the assumptions and rounded results from the first two Sam Houston Tax Talks articles.
- The $72,000 Solo 401(k) amount consists of a $24,500 employee deferral and a $47,500 employer contribution. It excludes an age-50 catch-up contribution.
- The SEP and SIMPLE figures illustrate contribution capacity under Sam's stated age, wage, ownership, and employee assumptions; they are not separate full-return tax projections.
- If Sam's prior-year FICA wages from the sponsoring employer exceeded $150,000, any 2026 age-50 catch-up contribution would generally have to be designated Roth. The modeled $72,000 excludes that catch-up and remains entirely pre-tax.
- Deadlines, employee coverage, compensation definitions, plan documents, and contribution elections can change the available result.
Disclaimer
This article is educational and is not individual tax, legal, accounting, investment, or retirement-plan advice. Plan selection and contribution calculations should be coordinated with the business owner's CPA, attorney, payroll provider, and plan advisor.
Choose the plan after modeling the whole business.
Contribution limits are only the beginning. Coordinate plan design with entity structure, compensation, cash flow, and the owner's long-term retirement goals.
- Confirm employee eligibility and ownership facts.
- Model the contribution and the full federal tax return.
- Document responsibilities before the plan is adopted.