Solo 401(k) vs. SEP vs. SIMPLE for High Earners With W‑2 + K‑1 Income (2025–2026 Limits)
If you’re a high earner with a strong W-2 salary, you already know the pain: your tax bill is meaningful, and many “standard” strategies phase out quickly at higher incomes.
But if you also have business income—especially income reported on a K-1—you may have a second and often underused lever for tax savings and wealth-building: choosing the right small business retirement plan.
In this post, I’ll walk you through how to choose between:
Solo 401(k) (also called a one-participant 401(k)),
SEP IRA, and
SIMPLE IRA,
specifically for high earners who have both W-2 income and K-1 income.
You’ll learn:
What counts as “retirement-plan-eligible” compensation in common W-2 + K-1 setups,
The key contribution limits for 2025 and 2026,
Why your W-2 employer plan changes the math, and
A practical decision framework (plus a numeric example, common mistakes, and FAQs).
Why this decision is different for W-2 + K-1 earners
When you have a W-2 job and a side business, you’re dealing with two separate realities at the same time:
Your employee deferral limit is shared across multiple plans.
If you max your W-2 401(k), you may have little (or zero) employee deferral room left for a Solo 401(k) or SIMPLE tied to your side business.Not all K-1 income counts as “compensation” for retirement plan purposes.
Some K-1 income can support plan contributions; other K-1 income cannot. This depends on whether the income is tied to earned income/self-employment earnings versus being a shareholder distribution or passive investment income.
If you get either of these wrong, you can end up with excess contributions, missed deductions, and cleanup work that becomes expensive and stressful.
Step 1: Confirm what “counts” as compensation in your scenario
W-2 wages (easy)
W-2 wages are straightforward: they’re compensation for retirement plan purposes.
Partnership / LLC taxed as a partnership (K-1) — usually based on “earned income”
For partners and many self-employed situations, the retirement plan calculations hinge on earned income / net earnings from self-employment, adjusted by certain deductions. Practically, this often ties back to self-employment earnings rather than simply “cash you received.”
S-Corp K-1 distributions (the most common high-earner trap)
If your side business is an S-Corp, the IRS position is clear: S-Corp shareholder distributions do not constitute earned income for retirement plan purposes. In plain English: you generally can’t fund retirement contributions “off the K-1 distributions.” Plan contributions are generally tied to W-2 wages paid to you by the S-Corp.
This matters a lot for high earners who keep W-2 wages low and take large distributions.
Passive K-1s (many real estate syndications)
A passive investment K-1 often does not create the kind of earned income that supports business retirement plan contributions. If the K-1 is largely investment income without self-employment earnings, the plan “fuel” may not be there.
Bottom line: Before comparing Solo 401(k) vs SEP vs SIMPLE, confirm whether your income stream actually supports the contributions you want to make.
Step 2: Know the two limits that drive almost every planning decision
Limit #1: Employee deferrals are per person (not per plan)
Your elective deferrals (the amount you choose to defer from pay) are limited annually—and that limit applies across your 401(k)/403(b) plans (with special rules for 457(b) plans).
If you max your W-2 employer 401(k), you may have no employee deferral capacity left for a Solo 401(k) tied to your side business for that same year.
Limit #2: Total contributions have a separate cap (and catch-up is extra)
Employer contributions plus employee deferrals are capped under the annual “defined contribution” limit (with catch-up contributions generally allowed on top, if applicable).
For high earners, this becomes a game of “which bucket am I filling”:
Employee deferral bucket (shared across employers), and
Employer contribution bucket (generally tied to the business plan and compensation).
2025 vs 2026 limits that matter for this comparison
Here are the planning numbers I use most often for high earners:
| Limit | 2025 | 2026 |
|---|---|---|
| 401(k)/403(b) elective deferral limit | $23,500 | $24,500 |
| Catch-up (age 50+, most plans) | $7,500 | $8,000 |
| Enhanced catch-up (age 60–63, if applicable) | $11,250 | $11,250 |
| Defined contribution annual additions limit (total, not counting catch-up) | $70,000 | $72,000 |
| SEP maximum contribution (tied to annual additions limit) | $70,000 | $72,000 |
| SIMPLE salary reduction limit | $16,500 | $17,000 |
| SIMPLE catch-up (age 50+) | $3,500 | $4,000 |
| Compensation cap used in plan calculations | $350,000 | $360,000 |
Side-by-side comparison: Solo 401(k) vs SEP vs SIMPLE (high earner lens)
| Feature | Solo 401(k) | SEP IRA | SIMPLE IRA |
|---|---|---|---|
| Best for | Owner-only business (plus spouse) | Flexible, low-admin employer plan | Small employers who want employee deferrals |
| Employee deferrals allowed? | Yes | No | Yes |
| Employer contributions allowed? | Yes | Yes | Yes (required formula) |
| Works well if you already max a W-2 401(k)? | Often still useful via employer contributions, but deferrals may be limited | Often useful via employer contributions | Often limited value personally if W-2 deferrals are already maxed |
| Setup timing | Earlier is better; some features are time-sensitive | Strong “late setup” flexibility | Must meet setup window and annual notice requirements |
| Employee impact if you have staff | Not a Solo plan anymore; employees may need coverage | Can become expensive because contributions must generally be uniform | Employer contribution rules are mandatory |
| Backdoor Roth compatibility | Generally cleaner (not an IRA) | Can complicate (SEP IRA counts as IRA) | Can complicate (SIMPLE IRA counts as IRA) |
The W-2 + K-1 decision framework (3 common scenarios)
Scenario A: You max your W-2 401(k) and have side business income
This is the most common “high earner” situation.
Your employee deferral room may be $0 in the side business plan if you already used it up at your W-2 job.
That pushes the strategy toward employer contributions in the side business plan.
In many cases, the decision becomes:
SEP IRA if you want simplicity and late setup flexibility, or
Solo 401(k) if you want flexibility and features (and you have no eligible employees other than spouse).
Scenario B: Your side business is an S-Corp (W-2 wages + K-1 distributions)
Here’s the planning reality: your contribution ceiling is often driven by your S-Corp W-2 wages, not the K-1 distributions.
If your S-Corp wages are low, your retirement plan contribution capacity may be low—even if the business has plenty of cash.
This scenario often becomes an integrated planning decision:
reasonable compensation,
payroll strategy,
and retirement plan design.
Scenario C: Your K-1 is largely passive investment income
If the K-1 doesn’t generate earned income/self-employment earnings, it may not support the kind of retirement plan contributions you’re hoping to make from that stream.
In that case, your planning may shift to other levers (tax bracket management, charitable planning, investment tax strategy, etc.) rather than a “side business retirement plan” play.
Step-by-step: How to choose the right plan (high earner checklist)
Identify your eligible compensation source
W-2 wages (W-2 job and/or your S-Corp).
Self-employment/partnership earned income (if applicable).
Confirm whether your K-1 is active (earned income) or passive.
Confirm whether you have (or will have) eligible employees
Solo 401(k) is intended for owner-only businesses (plus spouse).
If you have employees, plan selection and cost structure changes quickly.
Confirm whether you already max elective deferrals in your W-2 plan
If yes, don’t assume you can “max again” in the side business. The elective deferral limit is shared.
Decide your priority
Maximum tax-deductible contribution?
Minimal administration?
Employee-friendly benefits?
Avoiding complications with other strategies (like backdoor Roth)?
Pick the plan type that matches your reality
SEP IRA: simplest, strong for employer-only contributions, excellent late setup flexibility.
Solo 401(k): most flexible for owner-only businesses; can be powerful even if deferrals are limited due to W-2 maxing.
SIMPLE IRA: useful for teams and simplicity, but often a poor fit for high earners already maxing W-2 deferrals.
Real-world example (numbers)
Facts (2025 planning):
You earn $320,000 W-2 from your employer and max your employee 401(k) deferrals ($23,500).
You also have an active side business that generates eligible earned income for plan purposes.
Your side business can support an employer contribution of approximately $37,000 (illustrative; the exact number depends on entity type and compensation calculations).
Option A: SEP IRA for the side business
You contribute $37,000 as an employer contribution to the SEP IRA.
If you’re in a top bracket, a contribution of that size can reduce your federal tax meaningfully (state impact depends on your state return).
Why this works: It’s straightforward and doesn’t require tracking employee deferral limits, since SEP is employer-only.
Option B: Solo 401(k) for the side business
Your employee deferral room in the Solo 401(k) may be $0 because you already maxed it at your W-2 job.
But you may still be able to contribute a similar employer contribution (~$37,000), depending on compensation and plan design.
Why this can still be attractive: flexibility, plan features, and—importantly for some high earners—less interference with certain IRA-based strategies.
Option C: SIMPLE IRA for the side business
The SIMPLE salary reduction contribution is an elective deferral and is constrained by the same overall deferral rules.
If you already maxed deferrals at your W-2 job, SIMPLE can deliver limited personal benefit while still creating employer contribution obligations.
Takeaway: For many W-2 maxers, the SEP vs Solo 401(k) decision is usually the real decision. SIMPLE tends to be the right answer only in narrower cases (often involving employees and simpler benefits goals).
High earner “bonus” consideration: SEP/SIMPLE can complicate backdoor Roth plans
Many high earners use the backdoor Roth approach (non-deductible IRA contribution followed by a Roth conversion). Here’s the catch:
SEP IRAs and SIMPLE IRAs are still IRAs.
When you do IRA conversions, year-end IRA balances can affect the taxable portion of the conversion (this is the “pro-rata” issue).
So even if a SEP is otherwise perfect, it can create friction if you’re actively using backdoor Roth contributions as part of your overall plan.
This doesn’t automatically disqualify SEP/SIMPLE—it just means the retirement plan decision should be coordinated with your broader strategy, not made in isolation.
Common mistakes (and how to avoid them)
Maxing a W-2 401(k) and then also trying to max a side business deferral
This can create excess deferrals and correction work.
Fix: track elective deferrals across all plans.
Assuming any K-1 income equals “earned income”
Passive K-1s and S-Corp distributions are common traps.
Fix: confirm the income type and whether it supports plan contributions.
Choosing SEP or SIMPLE without modeling employee cost
SEP and SIMPLE can create real employer obligations when you have staff.
Fix: estimate total employer contribution cost before adopting.
Missing setup and notice deadlines
SEP often offers late setup flexibility.
SIMPLE has tighter timing and annual notice requirements.
Fix: decide earlier in the year, even if you fund later.
Forgetting how retirement plan choices interact with other strategies
Especially true for high earners using backdoor Roth planning.
Fix: coordinate your plan selection with your overall tax plan.
FAQ
Can I max my W-2 401(k) and still contribute to a Solo 401(k) for my side business?
Often yes—but your employee deferrals may be limited if you already used your annual deferral limit at your W-2 job. Employer contributions may still be available depending on your compensation and plan structure.
What’s the simplest plan if I want a big deduction with minimal admin?
A SEP IRA is frequently the simplest “big deduction” tool, especially when you don’t need employee deferrals and you value administrative simplicity.
Why do so many high earners use Solo 401(k)s for side businesses?
Flexibility. When designed properly and used in the right setting (owner-only business), a Solo 401(k) can be a powerful framework—even in years when W-2 deferrals are already maxed.
I have an S-Corp side business. Can I use distributions to calculate retirement plan contributions?
In general, retirement contributions are based on compensation (typically W-2 wages), not shareholder distributions.
When is SIMPLE actually the best answer?
SIMPLE can be useful when you want an employee-friendly plan with straightforward rules for a small team—but it’s often not the most powerful option for a high earner who is already maxing a W-2 plan.
Call to action
If you want a clean, defensible plan that maximizes retirement contributions without creating excess contributions or compliance headaches, I can help you:
Confirm what portion of your W-2 + K-1 income is retirement-plan eligible,
Calculate your maximum deductible contribution,
Evaluate employee implications and plan costs,
Coordinate the plan selection with your broader tax strategy (including Roth planning).
Book a planning call with The RVA Accountant: Contact Us
Disclaimer
This article is for educational purposes only and does not constitute tax, legal, or accounting advice. Consult with your tax advisor before implementing any strategy discussed here.