CFP® plan choice: SEP, SIMPLE or solo 401(k)?

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For a self-employed client, compare who may contribute, which employees must be covered and how the owner’s contribution is calculated. A SEP IRA makes employer contributions flexible, a SIMPLE IRA pairs employee deferrals with a required employer contribution, and a one-participant 401(k) can combine owner deferrals with employer contributions when there are no other eligible employees. A personal traditional or Roth IRA is a separate decision, subject to its own shared limit and eligibility rules.

Start with the decision, not the plan name

The question for a CFP® candidate is not which acronym looks most generous in isolation. It is which arrangement can actually be used by this business, what it costs to include staff, and how much the owner can contribute under the relevant tax-year rules. CFP Board’s retirement account learning objectives explicitly frame the work as differentiating owner plans and individual IRAs. That makes the comparison a planning exercise: identify facts first, calculate capacity second, and then explain the trade-offs.

Begin by asking whether the client is a sole proprietor or paid through a corporation, whether anyone else works for the business, and whether those people meet the chosen plan’s eligibility rules. Ask whether the owner also defers salary into another employer’s plan. The IRS says a one-participant 401(k) covers the owner alone or the owner and spouse, and its no-testing advantage disappears once eligible employees are hired. The IRS also says an owner’s elective deferral limit is personal across plans, so a second job can reduce remaining deferral room. A calculation that ignores either fact can overstate the solo plan’s appeal.

Next distinguish a tax deduction from a contribution. A traditional IRA contribution may be deductible, partly deductible or nondeductible according to workplace-plan coverage and income; a Roth IRA contribution is not deductible, and direct contribution eligibility also depends on income. Those features address the timing and availability of tax relief, whereas SEP, SIMPLE and one-participant 401(k) rules determine the business-plan contribution. Calling every contribution a deduction hides the question the candidate must answer.

What each arrangement actually buys

A SEP lets the employer fund an IRA for each eligible participant. The employer chooses a contribution for the year, subject to plan and statutory limits; regular SEP arrangements do not allow employee salary deferrals. Under the IRS’s published 2026 ceiling, an employer’s contribution for an employee cannot exceed the lesser of 25% of compensation or $72,000. That ceiling is not an instruction to multiply a sole proprietor’s Schedule C profit by 25%. The owner’s compensation calculation is circular because the owner’s contribution itself reduces the earnings used to calculate it. The IRS provides a reduced-rate method and worksheets for this reason.

A SIMPLE IRA allows eligible employees to defer pay and requires the employer to contribute. The IRS describes a usual choice between a match of employee deferrals up to 3% of compensation and a 2% nonelective contribution for eligible employees whether they defer or not. These are obligations with different consequences for a workforce whose members may choose different deferral amounts. The employer cannot treat a discretionary SEP contribution and a SIMPLE match as if they create identical staff costs. A SIMPLE also has employer eligibility conditions and a calendar-year setup process; those conditions should be checked before recommending it for a specific year.

A one-participant 401(k) gives a business owner two contribution capacities: an elective deferral as employee and an employer contribution. The IRS describes this as the owner wearing both hats. For 2026, the IRS publishes a $24,500 basic 401(k) elective deferral limit and a $72,000 overall annual-additions limit, excluding permitted catch-up contributions. These are separate constraints. A candidate who simply adds the largest displayed limits has counted the employee deferral twice, because that deferral is part of the annual additions. The plan’s own terms and the owner’s earned income can also impose a lower result.

A traditional or Roth IRA can sit alongside an employer arrangement if eligibility permits. The IRS states that the combined 2026 contribution to all traditional and Roth IRAs is limited to $7,500, or $8,600 at age 50 or over, and cannot exceed taxable compensation if that is lower. Splitting money between two IRA account types does not double the ceiling. Participation in a business plan does not itself prohibit an IRA contribution, but can affect the traditional deduction; income can constrain a direct Roth contribution. The CFP program page is a place to place this topic in a broader study plan, while the methodology page explains Omni’s approach to learning.

An illustrative owner comparison

Consider an invented owner with no common-law employees, no other workplace deferrals and $100,000 of adjusted self-employment earnings after reducing it by the deductible half of the owner’s self-employment tax. The figure is deliberately supplied after that adjustment so the exercise isolates the employer contribution rate; it is not a tax return calculation or a statement about a real client. Assume the plan uses a 25% employer contribution rate, the owner is below catch-up age, and the stated 2026 statutory limits apply. For a self-employed person, the IRS’s reduced-rate approach converts a 25% rate on compensation after the contribution into 20% of earnings before that contribution. On these assumptions, the SEP employer contribution is $20,000.

For a one-participant 401(k), the same illustrative employer amount is $20,000. Adding an assumed full $24,500 employee elective deferral gives $44,500. This remains below the IRS’s 2026 annual-additions ceiling and below the example’s adjusted earnings, so neither of those checks cuts it back. The difference from the SEP is the employee-deferral layer, not a larger employer percentage. If the owner already deferred some pay into another employer’s 401(k), the unused personal deferral capacity would have to be substituted; $44,500 would then be too high. The example is a way to expose the structure, not a maximum for every owner.

A SIMPLE comparison needs a separate deferral limit and employer formula. The IRS’s 2026 basic SIMPLE elective deferral limit is $17,000. Under the illustrative 3% match and enough owner deferral to earn it, 3% of the assumed $100,000 compensation is $3,000, so the illustrative total is $20,000. The arithmetic happens to equal the example SEP amount, but the components and obligations differ. If staff are eligible, the matching or nonelective employer cost for them enters the decision. If the owner’s actual SIMPLE compensation differs from this deliberately simplified input, recalculate rather than transplanting the result.

Add an employee and the answer may change

Now suppose that same business hires an employee who satisfies the applicable plan’s eligibility criteria. The solo label does not let the owner exclude that person. The IRS states that a 401(k) that hires eligible employees must include them and may become subject to nondiscrimination testing unless an exemption applies. The plan can still be a 401(k), but it is no longer the owner-only comparison just performed. A candidate should not say it becomes legally impossible to operate any 401(k); the precise issue is loss of one-participant status and new staff obligations.

Under a SEP, eligible employees generally receive the same contribution percentage under the arrangement. If the employer chooses a high owner percentage, staffing cost scales with eligible pay. Under a SIMPLE, the employer instead chooses its specified match or nonelective formula. A match depends on deferrals, while the nonelective contribution does not. That distinction can reverse a superficially obvious recommendation. For a workforce in which few employees defer, the cash cost under the match may be lower than under the nonelective choice, although notice and plan rules still matter. The planner must explain both what the owner can save and what the business commits to fund for others.

The exam traps and a practical check sequence

First, never apply the employee’s 25% SEP rate straight to a sole proprietor’s profit. The IRS explains that the owner’s net earnings must be adjusted for the deductible part of self-employment tax and the owner’s own contribution. If a question supplies raw profit rather than adjusted earnings, calculate that intermediate step using the applicable tax rules and then apply the reduced contribution rate. If it supplies adjusted earnings, do not subtract the same item again. Label every base before multiplying it.

Second, separate a limit on elective deferrals from an overall limit on annual additions. The owner’s 401(k) elective deferral counts within the overall additions limit, while catch-up contributions have their own treatment. Third, check whether a client used another workplace plan. An IRA limit is shared across traditional and Roth IRAs; the 401(k) elective deferral limit is shared across that individual’s plans. These are different aggregation rules, and mixing them creates plausible-looking wrong answers.

Fourth, verify timing and administration when the problem moves from arithmetic to implementation. The IRS says a one-participant 401(k) generally must file Form 5500-EZ once its year-end assets reach $250,000. A SIMPLE IRA requires a plan document and employee notices, and the IRS describes general effective-date restrictions. A SEP may be simpler to administer but can require contributions for eligible workers. “Simple” in a plan name never means no conditions.

A reliable written answer therefore runs in order: describe the business and workforce; identify eligible plan types; determine owner and employer contribution components; test personal and overall limits; add staff funding and filing obligations; then discuss the separate IRA decision. Recheck the relevant tax year’s IRS figures because contribution limits and income thresholds change. The reader should leave with a method that survives a different income level or headcount, rather than a memorised winner from this one example.