Small-Business Retirement Plan Selection Matrix
Match income, Roth goals, staffing, and administration to the right plan
- Difficulty
- Moderate
- Time to result
- ~days to results
- Steps
- 5
- Confidence
- 95%
Start with four facts: net business income, the desired tax treatment, who works in the business, and how much administration the owner will accept. A solo 401k offers greater contribution flexibility at lower or variable income because only part of the contribution is tied to earnings. Adding a mega backdoor Roth feature serves owners whose priority is Roth saving. A SEP IRA can still maximize tax-deferred contributions when income is consistently high, but its employer-only percentage formula requires more income to reach the annual limit. Staffing can override the apparent winner: eligible non-owner employees can trigger owner contribution costs, while spouses and multiple owners may remain within a solo plan. The final comparison must also include filings, deadlines, and contribution calculations rather than convenience alone.
Origin
Extracted from Masters in Business
Core principles
- 01Choose a plan from income and objectives rather than simplicity alone
- 02Use a solo 401k when lower or variable income demands contribution flexibility
- 03Use the mega backdoor Roth feature when Roth contributions are the priority
- 04Let consistently high income make a SEP IRA's percentage formula workable
- 05Account for employees and partners before selecting an owner-focused plan
How to run it
- 1
Set the savings objective
Decide whether the main goal is Roth accumulation, current tax deferral, or simply the largest permitted contribution. This objective determines which plan features matter most.
Pro tip Separate tax-treatment preference from the desire to maximize the dollar contribution.
Watch out Defaulting to the first plan a CPA mentions can hide a better fit.
- 2
Model business income
Estimate net income and whether it remains high or varies across years. Compare how much each plan permits at that income rather than comparing annual limits in isolation.
Pro tip Test both a normal year and a lower-income year when earnings fluctuate.
Watch out A SEP IRA contribution is directly tied to earnings, so the headline limit may be unreachable at lower income.
- 3
Map the workforce
List owners, spouses, partners, and non-owner employees, then check who is eligible. Determine whether employee contributions would make the preferred structure too costly or disqualify an owner-only arrangement.
Pro tip Treat a spouse or partner's ownership status separately from ordinary employee status.
Watch out An eligible non-owner employee changes the economics of both solo 401k and SEP IRA designs.
- 4
Compare plan mechanics
Calculate the available contribution and tax treatment under a SEP IRA, a regular solo 401k, and a solo 401k with a mega backdoor Roth feature. Include any need to give employees the same compensation percentage under a SEP IRA.
Pro tip Use actual compensation figures for every covered person.
Watch out The employee deferral limit aggregates across plans even when each plan has its own overall limit.
- 5
Price the administration
Compare setup documents, contribution tracking, annual filing thresholds, and funding deadlines. Select the plan whose savings benefit justifies its compliance burden.
Pro tip Create a recurring reminder before any required Form 5500-EZ deadline.
Watch out Missing a required filing can produce penalties far larger than the cost of administering the plan correctly.
In the wild
A solo consultant wants to save as much as possible, but income changes materially from year to year. Applying the matrix, the consultant favors a solo 401k because it preserves more contribution flexibility in lower-income years than a SEP IRA whose contribution is entirely tied to earnings.
→ The selected structure better supports high savings despite uneven annual income.
An owner has consistently high net income, does not prioritize Roth contributions, and wants maximum current tax deferral with a simpler structure. The matrix points toward a SEP IRA because the income is high enough for its percentage-based contribution to approach the annual maximum.
→ The owner reaches the tax-deferral objective without choosing extra plan complexity solely for contribution flexibility.
A solo owner has sufficient net income and wants the largest available Roth contribution rather than only pre-tax deferral. The matrix elevates a solo 401k with a mega backdoor Roth feature, subject to the owner's exact income and plan design.
→ The plan choice follows the desired tax treatment rather than convenience alone.
Common mistakes
Choosing the SEP by default
A SEP IRA is simpler and often recommended first, but it can produce a lower contribution than a solo 401k when income is lower or variable.
Comparing only headline limits
The same overall limit does not mean each plan reaches it at the same income. Contribution formulas and employee-deferral rules change the result.
Ignoring workforce eligibility
Non-owner employees can end solo-plan eligibility or require costly employee contributions, while spouses and owners receive different treatment.
Is it for you?
Best for
It is best for solo practitioners and owner-only businesses seeking to maximize retirement contributions from business income.
Not ideal for
It is not ideal for businesses with eligible non-owner employees or owners who need plan-specific legal and tax advice.
From the transcript
“it really depends on your income and your objectives.”
“If your income is on the. Lower side, or maybe it varies from year to year, the solo K is going to certainly allow the…”
“if your income is consistently high and ROTH is not a priority, you just want to maximize your tax deferrals, then a SEP is going…”
From the episode
At The Money: How to Max Out Your Small Business Retirement Plan