The best retirement plan depends on more than the maximum contribution
A retirement plan can help business owners prepare for life after work while creating an employee
benefit and potentially reducing current taxable income. But the simplest plan is not always the
best fit. Your ideal choice depends on compensation, business cash flow, workforce size,
employee eligibility, owner age, administrative costs and how predictably the business can fund
contributions. A retirement plan also has to satisfy applicable coverage and nondiscrimination
requirements. [1][2]
SEP IRA: straightforward employer contributions
A Simplified Employee Pension (SEP) IRA typically lets the employer decide whether and how
much to contribute each year. Traditional SEP contributions are employer-funded and eligible
employees generally must receive the same contribution percentage of eligible compensation.
SEP contributions are immediately vested. For 2026, the SEP maximum is $72,000, subject to
compensation-based rules; the headline maximum is not available to every owner. An owner who
receives W-2 wages from an S corporation calculates SEP contributions based on eligible
compensation, not S corporation distributions. [2][3]
Traditional 401(k): flexible employee and employer contributions
A traditional 401(k) can combine employee salary deferrals with employer matching or profit-
sharing contributions. For 2026, the standard elective deferral limit is $24,500. Where permitted,
an additional $8,000 catch-up applies at ages 50 and older, while eligible participants ages 60–63
have an $11,250 higher catch-up limit. The general 2026 defined-contribution annual additions
limit is $72,000, excluding eligible catch-up contributions. Certain highly compensated workers
must make catch-up contributions as Roth contributions under applicable 2026 rules. Plan
design, tests and compensation limits matter. [3][4]
SIMPLE IRA: a smaller-employer option
A SIMPLE IRA can offer employees salary deferrals with required employer contributions and
less administration than many conventional 401(k) arrangements. In 2026, the standard SIMPLE
salary-reduction limit is $17,000, with catch-up limits and potential higher amounts for qualifying
plans. Employers generally must choose an eligible matching or nonelective contribution
arrangement. This structure can be appealing when providing access to retirement savings is
important but a full 401(k) is not yet practical. [1][3]
Cash balance and other defined benefit plans: potentially larger funding commitments
A cash balance plan is a type of defined benefit plan. Rather than applying a single universal
annual contribution limit, an actuary determines required contributions based on the promised
benefit and plan factors. For 2026, the statutory annual defined benefit limit is generally the lesser
of the participant’s applicable compensation limit or $290,000 in annual retirement benefits—not a
$290,000 annual contribution allowance. These arrangements can be useful for owners seeking
additional retirement funding, especially with stable cash flow, but they involve ongoing funding,
actuarial administration and employee benefit requirements. [2][5]
How to choose among these plans
Start with five questions: (1) How much can the business afford to fund during a slow year? (2)
Which employees will be eligible now and soon? (3) Are owner contributions or employee
participation the primary objective? (4) Can the firm support administration and ongoing
compliance? (5) How close is the owner to retirement? Compare the total employer cost, not
only the owner’s possible tax deduction. A qualified retirement-plan specialist and tax advisor
should model plan design before implementation.
Frequently asked questions
Is a SEP IRA better than a 401(k)? Neither is universally better. SEP IRAs are relatively
simple, while a 401(k) can allow employee deferrals and more varied employer contributions.
Can a small company offer a cash balance plan? Potentially, but actuarial requirements and
employee coverage rules need careful assessment.
Are retirement contributions always deductible? Deductibility depends on the plan,
contribution type, compensation, timing and applicable tax rules. Roth contributions are generally
not currently deductible.
Next step: review the plan against your business goals
Choosing a retirement plan should be part of a broader strategy that considers cash flow, tax
planning, business succession and long-term retirement income. Patron Partners can help you
evaluate your planning objectives and coordinate with your CPA and retirement-plan specialists
to explore suitable alternatives. Contact Patron Partners to schedule a retirement-plan strategy
discussion.
Sources and further reading
1. IRS, Choosing a Retirement Plan: Plan Options
https://www.irs.gov/retirement-plans/choosing-a-retirement-plan-plan-options
2. IRS, 2026 Retirement Plan Dollar Limitations
https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-
contributions
3. IRS, Retirement Topics: 401(k) Contribution Limits
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-401k-and-profit-
sharing-plan-contribution-limits
4. IRS, Publication 560: Retirement Plans for Small Business
https://www.irs.gov/publications/p560
5. IRS, Defined Benefit Plan Benefit Limits
https://www.irs.gov/retirement-plans/plan-participant-employee/retirement-topics-defined-benefit-
plan-benefit-limits
6. U.S. Department of Labor, Choosing a Plan
https://www.dol.gov/agencies/ebsa/employers-and-advisers/small-business-owners/choosing-a-
plan
7. This article was adapted from educational material originally published in VFO Inner Circle Special Report by John J. Bowen Jr., © 2022 AES Nation, LLC. All rights reserved. Content has been rewritten, updated, and expanded by Patron Partners for educational purposes.
Important disclosure: This article is for general educational purposes only and is not
individualized investment, tax, legal or medical advice. Information and rules may change.
Consult appropriately qualified professionals about your specific circumstances. No strategy is
guaranteed to produce a particular result.