A dentist with three employees and $400,000 in income asks: "simplified employee pension (SEP), SIMPLE, or solo 401(k)?" Answer wrong and you either leave $100,000 of deductible contributions on the table or saddle the practice with mandatory contributions it cannot afford.
NOTE: OBBBA and retirement limits. The 2026 contribution limits in this lesson ($24,500 elective deferral, $8,000 catch-up, $11,250 super catch-up, $72,000 415(c), $7,500 IRA, $17,000 SIMPLE) reflect normal inflation indexing and SECURE 2.0, NOT OBBBA-specific changes. OBBBA did NOT alter qualified-plan contribution limits. OBBBA does affect retirement planning indirectly through the new tip / overtime exclusions (which lower the W-2 wage base for plan purposes) and the senior bonus deduction (which can shift the standard-vs-itemized decision after retirement). For the full OBBBA picture, see lesson E36b: OBBBA Tax Law Changes.
Every employer plan falls into one of two categories.
A defined benefit plan promises a specific retirement benefit, typically a monthly annuity (e.g., 2% of final average salary per year of service). The employer bears all investment risk. Requires annual actuarial valuations.
Common mistakes
- Assuming governmental 457(b) has a 10% penalty. Governmental 457(b) distributions are penalty-free at any age after separation. Trap: "10% penalty" for a 55-year-old's governmental 457(b) distribution.
- Forgetting the SIMPLE 25% penalty. During the first two years of participation, the early withdrawal penalty is 25%, not 10%. Trap: "10% penalty" for a SIMPLE IRA distribution at 18 months.
- Mixing up SEP and SIMPLE mechanics. SEP = employer-only, no deferrals. SIMPLE = employee deferrals plus mandatory employer match or 2% non-elective. If the question mentions employee salary deferrals, SEP is eliminated.
Bottom line
- Defined benefit shifts investment risk to the employer with a formula-based benefit (max $290,000/year in 2026), best for older, high-income owners; defined contribution leaves the risk with the employee.
- 401(k): $24,500 deferral, $8,000 catch-up (50+), $11,250 enhanced catch-up (60-63); employer match/profit-sharing up to the $72,000 Section 415(c) limit.
- 457(b) limits are independent of 401(k)/403(b), so dual participants can double deferrals; governmental 457(b) distributions are penalty-free.
- SEP: employer-only, same % for all, immediate vesting, no testing. SIMPLE: 100 or fewer employees, $17,000 deferral, 25% penalty in the first two years.
Exam shortcut
DECISION: (1) 501(c)(3)/school → 403(b); state/local gov → 457(b); for-profit → 401(k). (2) ≤100 employees → SIMPLE; self-employed, no staff → solo 401(k). (3) Want flexibility → profit-sharing/SEP; want mandatory → money purchase/DB. "SEP = Same for Everyone, Period." "SIMPLE = Small, Immediate, Match, Low-limit, Easy." 457(b): "Independent and Innocent", independent limits, no penalty. SIMPLE penalty: "Two years = two-and-a-half times the normal penalty."
The full lesson (about 2,411 words, 16 min read) adds 2 worked examples, all 5 common mistakes, a self-check, free in the app.
Learning objectives
- F.47
Browse all free CFP lessons or jump into free CFP practice questions.