Money Talk with Malik | Financial Planning for Builders

Key Takeaways

A Solo 401k lets self-employed founders contribute up to $70,000 in 2026 if your income supports it, far more than most people realize
A SEP IRA is simpler to set up but limits you to 25% of net self-employment income, which can be a real constraint at lower income levels
A SIMPLE IRA is designed for small businesses with employees and is rarely the right first choice for solo founders
The Roth option inside a Solo 401k is valuable if you expect to be in a higher tax bracket later
None of these accounts require large upfront contributions, you can start small and scale

This is one of those questions I get fairly regularly from founders who just went out on their own or left a corporate job to build something. They know they should be doing something with retirement, but the options feel complicated, right?

I get it. The names sound similar. The IRS rules aren't written in plain English. And when you're focused on building a company, taking two hours to figure out retirement accounts doesn't feel like the most urgent thing.

But realistically, this decision matters. Not just for retirement, but for what you're paying in taxes right now.

Let me break this down simply.

What is a Solo 401k and who is it for?

A Solo 401k, sometimes called a one-participant 401k or an individual 401k, is a regular 401k plan designed for self-employed people with no full-time employees other than a spouse.

This is usually the right answer for founders who are self-employed, consulting, or running an early-stage company without W-2 employees.

Here's why the contribution limits are so powerful.

In a Solo 401k, you make contributions in two ways. As the employee, you can contribute up to $23,500 in 2026 (plus an additional $7,500 if you're 50 or older). As the employer, you can contribute up to 25% of your net self-employment compensation. Combined, the total limit is $70,000 in 2026.

So if you're generating $150,000 in net self-employment income, you could contribute $23,500 as the employee and roughly $37,500 as the employer, for a total of $61,000. That's $61,000 out of your taxable income.

That's not a small number.

What is a SEP IRA and when does it make sense?

A SEP IRA stands for Simplified Employee Pension. It's a retirement account for self-employed people or small business owners, including businesses with employees.

The contribution limit is simpler to calculate: 25% of net self-employment income, up to a maximum of $69,000 in 2026.

Where a SEP IRA falls short compared to a Solo 401k is at lower income levels.

If you're making $60,000 in net self-employment income, your max SEP IRA contribution is $15,000 (25% of $60,000). With a Solo 401k, you could contribute up to $23,500 as the employee contribution regardless of income, as long as you have that much in self-employment income.

The SEP IRA wins on simplicity. Setup is fast, there's no annual filing requirement with the IRS, and you can open one at any brokerage. If you already have employees, you can also cover them with a SEP IRA, though you'd have to contribute the same percentage of compensation for all eligible employees as you do for yourself.

What is a SIMPLE IRA?

A SIMPLE IRA stands for Savings Incentive Match Plan for Employees. It's designed for businesses with 100 or fewer employees.

The employee contribution limit for 2026 is $16,500, plus $3,500 in catch-up contributions if you're 50 or older.

Here's the thing though: employers are required to either match employee contributions up to 3% of compensation, or make a flat 2% contribution for all eligible employees whether they contribute or not.

For a solo founder, a SIMPLE IRA almost never makes sense. The contribution limits are lower than a Solo 401k, and the mandatory employer contribution requirement adds complexity you don't need when you're the only employee.

Where SIMPLE IRAs show up is in small professional firms and small businesses that want to offer a plan to employees without the administrative burden of a traditional 401k.

Should you choose traditional (pre-tax) or Roth contributions?

If your Solo 401k provider offers a Roth option, this is worth thinking through.

Traditional contributions reduce your taxable income now. You pay taxes when you withdraw in retirement.

Roth contributions don't give you a deduction today. But the money grows tax-free, and withdrawals in retirement are tax-free.

For founders who are in a low-income year, maybe you're early stage and not drawing much salary yet, this is actually one of the best times to make Roth contributions. You're in a lower bracket today. If the company grows and your income increases, you'll be glad you paid the taxes now.

For founders who are already in a high tax bracket and need the deduction now, traditional contributions make more sense.

You got to be smart about matching the account type to your actual situation, not just defaulting to whatever feels familiar.

How do you choose between these three options?

Here's a simple way to think about it.

If you're self-employed with no full-time employees and you want to maximize contributions: Solo 401k.

If you want simplicity over optimization and have few or no employees: SEP IRA.

If you have employees and want a low-cost, low-admin plan for the whole team: SIMPLE IRA.

Most founders I work with end up in the Solo 401k camp. The contribution flexibility is genuinely valuable, especially in years when income is variable. You can choose how much to contribute as the employee contribution, and the employer portion is profit-based, so it scales naturally with what you actually earn.

What about contribution deadlines?

For a Solo 401k, you need to establish the plan by December 31 of the tax year you want to make contributions for. You can actually make the contributions up to the tax filing deadline, including extensions.

For a SEP IRA, you can set up and fund the account up to the tax filing deadline including extensions, which gives you until October 15 in most cases. This is one of the SEP IRA's practical advantages.

SIMPLE IRAs have to be established by October 1 of the year you want them to be effective.

Summary

None of this has to be complicated. Realistically, most early-stage founders who are self-employed or running a lean team are best served by a Solo 401k. The contribution limits are generous, the Roth option gives you flexibility, and it doesn't take long to set up through most major brokerages.

The key is just to start. Even if you're only contributing $500 a month right now, that's money growing tax-advantaged instead of sitting in a checking account. The boring stuff compounds, right? That's the whole point.