How they compare
| SEP IRA | Cash balance plan | |
|---|---|---|
| Kind of plan | Employer contributions to your own IRA; treated as a defined contribution plan for limits | Defined benefit pension with an account balance |
| 2026 limit | 25% of pay, up to $72,000. No catch-up | Set by age, pay and years in business |
| Salary deferrals | No | No |
| Required each year | No | Yes, at least the minimum required contribution |
| Paperwork | A one-page adoption form; no annual return | Plan document, yearly actuarial valuation, Form 5500-EZ once assets pass $250,000 |
| Latest date to set up for a year | The business's tax return due date, with extensions | The business's tax return due date, with extensions |
For a sole proprietor or partner, the 25% works out to about 20% of net self-employment earnings, because the contribution itself reduces the earnings it is measured against.
The limits by age
A SEP's ceiling does not move with age. A cash balance plan's does, because it funds a retirement benefit of up to $290,000 a year over the years you have left before retirement.
| Age | SEP IRA | Cash balance plan |
|---|---|---|
| 40 | $72,000 | $103,000 |
| 45 | $72,000 | $156,000 |
| 50 | $72,000 | $201,000 |
| 55 | $72,000 | $260,000 |
| 60 | $72,000 | $270,000 |
Your own figures depend on your pay and history. Try the SEP IRA calculator and the cash balance calculator.
The Form 5305-SEP problem
Most SEP IRAs at brokerages are set up with the IRS model form, Form 5305-SEP, or with a document that copies its terms. The form's instructions say not to use it if you currently maintain any other qualified retirement plan, apart from another SEP. The IRS adds that a plan counts as maintained even in a year no contributions are made to it.
So if you adopt a cash balance plan for a year, a model SEP cannot also be used for that year. The IRS does allow a SEP alongside another plan, but only through a pre-approved (prototype) SEP or an individually designed one, not the model form. Ask your brokerage which document your SEP uses.
If you have already contributed to a SEP this year
Any SEP contribution for the year counts as an employer defined contribution. That matters for three limits: the 6%-of-pay allowance under the combined deduction limit, the $72,000 annual additions limit shared with any 401(k), and the 25% deduction limit for defined contribution plans. A SEP contribution above 6% of pay can make part of the combined total nondeductible when the cash balance contribution is large.
Practitioners usually describe these routes:
- Replace the model SEP with a pre-approved or individually designed SEP that permits another plan, and keep the year's SEP contribution at or under 6% of pay.
- Remove the contribution as an excess, with its earnings, before the tax return due date. The IRS says a timely withdrawal avoids the 6% excise tax on excess contributions, though the amount is included in income.
- Use the IRS correction programs where the problem has already happened and cannot be undone simply.
- Skip the Solo 401(k) employer contribution for the year and let the SEP contribution serve as the employer defined contribution piece.
Whether a SEP document can be swapped for a different one after a contribution has already been made for the year is not settled in anything the IRS has published that we have seen. This is a decision to make with your tax adviser before funding the cash balance plan.
Why a Solo 401(k) usually replaces the SEP
Once a cash balance plan is in place, employer contributions to any defined contribution plan are generally held to 6% of pay, whether they go into a SEP or a 401(k). What the SEP cannot offer is a salary deferral.
- A Solo 401(k) lets you defer up to $24,500 of your own pay, plus a catch-up from age 50, and deferrals are not counted in the combined deduction limit. A SEP has no deferral at all.
- A Solo 401(k) can take Roth contributions.
- A Solo 401(k) is a qualified plan in its own right, so there is no model-form conflict.
The cost is a little more setup. The 401(k) needs its own plan document and its own trust tax ID, and its assets count with the cash balance plan's toward the $250,000 test for Form 5500-EZ. Deferral elections also have timing rules: a corporation's owner has to defer from paychecks during the year, while an owner of an unincorporated business with no employees has more time in the plan's first year. See cash balance plan deadlines.
How the two plans fit together is in using a cash balance plan with a Solo 401(k).
When a SEP alone still makes sense
If you are under about 40, want to save no more than $72,000 a year, or cannot commit to a yearly contribution, a SEP or Solo 401(k) on its own is simpler and cheaper. A cash balance plan earns its cost and commitment when you want to save well beyond those limits for several years in a row.