Comparison: SEP IRA vs Solo 401(k)
- Miranda Kishel
- Jul 6
- 2 min read
If you're a self-employed business owner or sole proprietor, choosing the right retirement plan can double as a powerful tax shelter. Two of the most popular options are the SEP IRA and the Solo 401(k). Both offer significant tax-deferred savings opportunities, but they have very different rules, benefits, and administrative requirements.
Choosing the right plan can help you:
Lower your tax bill now
Save aggressively for retirement
Remain flexible as your business grows
Let’s break them down side-by-side so you can choose the right one for your business.
SEP IRA vs Solo 401(k): Quick Comparison
Feature | SEP IRA | Solo 401(k) |
Who Can Contribute | Employer only | Employer + Employee (you are both) |
Max Annual Contribution | ~25% of compensation, up to $69,000 (2024 limit) | $69,000 total (2024), but includes salary deferral |
Catch-Up Contributions | Not allowed | Additional $7,500 if age 50+ |
Loans Available | No | Yes, up to $50,000 or 50% of plan balance |
Roth Option | No | Yes, employee portion can be Roth |
Set-Up Deadline | Tax filing deadline + extensions | Dec 31 of the tax year (for employee deferral) |
Administrative Burden | Minimal | Moderate (requires Form 5500-EZ if >$250K assets) |
Ideal For | Simple, low-maintenance saving | High earners seeking max contributions & flexibility |
Advantages and Disadvantages
SEP IRA – Pros
Easiest to set up and manage
No annual filing requirement
Works well for businesses with variable income
SEP IRA – Cons
Employer-only contributions (limits flexibility)
No Roth or loan options
Contributions must be equal % for all employees
Solo 401(k) – Pros
Highest contribution potential (especially for lower salaries)
Includes Roth and loan features
Can combine salary deferral + profit sharing
Solo 401(k) – Cons
Slightly more complex administration
Must be established during the tax year (not by filing date)
Annual filings required if balance exceeds $250,000
Real-World Implications
A solo consultant earning $100K: A Solo 401(k) could allow ~$23K in employee deferral + ~20K in employer contributions = more tax sheltering.
A small business with inconsistent profits: A SEP IRA might be easier to manage and contribute only when cash flow allows.
A 52-year-old owner: Only the Solo 401(k) allows catch-up contributions, adding an extra $7,500 in tax-deferred savings.
Which Plan Fits Your Business?
Business Type | Recommended Plan | Why |
Freelancer/Consultant | Solo 401(k) | Maximize contribution flexibility and tax savings |
Owner with one part-time worker | SEP IRA | Simpler to manage, contribution only when profitable |
Over 50 with high income | Solo 401(k) | Allows catch-up contributions and larger Roth options |
Seasonal income | SEP IRA | Optional contributions each year, minimal paperwork |
Final Thoughts
Both the SEP IRA and Solo 401(k) are excellent retirement plans for small business owners and powerful tax strategy tools. The best option depends on your income, age, and goals. If you're unsure how to set them up—or how to integrate them with your overall tax strategy—we can help.
Explore our Tax Advising Services to get a personalized tax plan that lowers your taxes now and sets you up for long-term success.
