Solo 401(k) vs. SEP IRA: Which One Is Right for You?
- Sophia Yu
- Oct 23
- 3 min read
If you’re self-employed or own a small business, one of the best ways to build wealth and save on taxes is through a retirement plan.
Two of the most popular options are the Solo 401(k) and the SEP IRA. Both allow you to put away large amounts for retirement while reducing your taxable income — but the rules, flexibility, and potential tax savings differ.
So, which plan makes the most sense for you? Let’s break it down.
The Basics: What’s the Difference?
Both plans are designed for business owners with no (or few) employees, but they work differently:
A SEP IRA (Simplified Employee Pension) is straightforward — your business makes contributions directly into your IRA.
A Solo 401(k) (also known as an Individual 401(k)) lets you contribute as both the employer and the employee, giving you more control and higher contribution limits.
In short:
SEP IRA = simpler setup. Solo 401(k) = more flexibility and higher contribution potential.
Where the Tax Savings Come From
The main difference lies in how much you can contribute — and therefore, how much you can deduct from your taxable income.
Example: You earn $100,000 in net self-employment income.
Under a SEP IRA:
You can contribute up to 25% of your net income, capped at $69,000 (for 2024).
So, 25% of $100,000 = $25,000 contribution (tax-deductible).
Under a Solo 401(k):
You can make an employee deferral up to $23,000 (or $30,500 if age 50+).
Plus, an employer contribution of up to 25% of your net income.
That means you could save over $48,000 total in the same scenario — nearly double the SEP amount.
Roth Option: The New and the Proven
Traditionally, only Solo 401(k) plans offered a Roth option, allowing you to make after-tax contributions that grow and withdraw tax-free in retirement.
However, beginning in 2023, the SECURE 2.0 Act introduced the Roth SEP IRA.
This means business owners can now make Roth contributions to their SEP IRAs — but here’s the catch:
Since this rule is new, many financial institutions are still rolling out the Roth SEP IRA option, and some may not support it yet.
So while both plans can potentially offer Roth growth, the Solo 401(k) currently provides wider access, more flexibility, and better-established Roth features (such as Roth rollovers and in-plan conversions).
When a SEP IRA Still Makes Sense
A SEP IRA can still be a great choice if:
You want a simple setup with minimal maintenance.
You have employees, since SEP contributions must be proportional for all eligible staff.
You’re looking for a last-minute deduction — SEPs can be opened and funded up to your tax-filing deadline, even for the prior year.
You prefer to avoid annual filing (no Form 5500 required).
For smaller or newer businesses, the SEP IRA remains one of the easiest ways to start saving for retirement.
When to Choose a Solo 401(k)
A Solo 401(k) is typically best if you:
Have no employees other than a spouse.
Want to maximize contributions at moderate income levels.
Want a Roth option with full platform support.
Would like the ability to borrow from your plan (loans up to $50,000).
Are focused on long-term retirement and tax planning.
It requires a bit more setup and an annual Form 5500 once the balance exceeds $250,000, but the additional flexibility often makes it worth it.
Your Retirement Strategy Matters
Choosing between a SEP IRA and a Solo 401(k) isn’t just about saving for retirement — it’s about building a tax-smart wealth strategy that fits your business and income goals.
If you’re earning strong profits and haven’t reviewed your retirement plan recently, now is the time to see whether you’re missing out on tax savings or Roth opportunities that could grow tax-free for decades.
Ready to Find Out Which Plan Fits You Best?
We’ll help you compare both options side-by-side based on your income, business setup, and goals — and calculate your exact potential tax savings. Book a free discovery call with our CPA here.
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