When the SEP IRA isn’t “SEP-ing” Anymore: Is It Time to Consider a 401(k)?

As businesses grow and evolve, the retirement plan that once seemed like the perfect fit may no longer provide the flexibility, tax advantages, or employee benefits needed for the next stage of growth. We often speak with business owners who started with a SEP IRA because it was simple and inexpensive, but eventually find themselves asking whether a 401(k) plan would better support their goals.

Why Business Owners Start with a SEP IRA

SEP IRAs are popular among small businesses and self-employed individuals because they are easy to establish and administer. They allow employers to make tax-deductible contributions and require minimal ongoing administrative effort.

However, they have important limitations. SEP IRA contributions are employer-funded only, and eligible employees must generally receive the same contribution percentage as the owner. This can become costly as a company grows and adds staff.

When a 401(k) May Be the Better Option

As your business expands, a 401(k) plan can offer significantly more flexibility.
With a 401(k):

• Employees can make their own salary deferral contributions.
• Employers can choose whether to make matching or profit-sharing contributions.
• Contribution formulas can be designed to align with business objectives.
• Roth contribution options may be available.
• Participant loans may be permitted.
• Vesting schedules can be added for employer contributions.

This flexibility often makes a 401(k) a powerful tool for attracting and retaining top talent.

Potential Tax Advantages

One often overlooked benefit of a 401(k) is the potential for payroll tax savings. Because employee deferrals reduce taxable wages, the overall payroll tax burden may be lower than with a SEP IRA strategy that relies entirely on employer contributions. Additionally, employers may structure contributions to optimize tax benefits.

Comparing Contribution Opportunities

For 2026, a SEP IRA allows contributions up to the lesser of 25% of compensation or $72,000. A 401(k), by contrast, combines employee salary deferrals with employer contributions, creating additional planning opportunities while still allowing total contributions up to the applicable limits. Individuals age 50 and older may also be eligible to make catch-up contributions.

Questions to Ask Yourself

You may want to evaluate a move from a SEP IRA to a 401(k) if:

• Your business has experienced significant growth.
• You want to maximize retirement savings while managing payroll taxes.
• You would like more flexibility in contribution design.
• You want to offer a more competitive employee benefit package.
• You are looking for ways to improve employee recruitment and retention.

A SEP IRA remains an excellent retirement plan for many small businesses, especially those with few or no employees. However, as your company grows, a 401(k) may offer greater flexibility, better tax planning opportunities, and valuable benefits for owners and employees.

If you're wondering whether your current retirement plan remains the best fit for your business, the team at The Ryding Company can help you evaluate your options, 401k administration, and develop a strategy aligned with your retirement and business goals.

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