Solo 401(k) vs. SEP IRA: Which Is Right for Your Business?

You know you need to save for retirement. You have heard that self-employed business owners have access to powerful retirement accounts with contribution limits far beyond a traditional IRA. You have narrowed it down to two options: the Solo 401(k) and the SEP IRA.

Both are excellent. Both can shelter up to $70,000 per year from taxes. But they work differently, and the right choice depends on your income level, your business structure, and how much flexibility you want.

Here is a clear, numbers-driven comparison to help you decide.

How Each Account Works

Solo 401(k): Two Contribution Buckets

The Solo 401(k) gives you two ways to contribute, which is what makes it so powerful at lower and mid-range income levels.

• Employee deferral: $23,500 per year (2025 IRS limit). This is a flat amount you can contribute regardless of your income level, as long as you have at least that much in earned income.
• Employer profit-sharing: Up to 25% of your W-2 compensation (if you operate as an S-Corp) or 25% of net self-employment income after the self-employment tax deduction (if you are a sole proprietor or single-member LLC).
• Total maximum: $70,000 per year if you are under 50. If you are 50 or older, you can add a $7,500 catch-up contribution for a total of $77,500.

Additional features:

• Roth contribution option (pay taxes now, withdrawals in retirement are tax-free)
• Loan provision (borrow up to $50,000 or 50% of your vested balance)
• Available only to business owners with no full-time employees other than a spouse

SEP IRA: One Contribution Bucket, Maximum Simplicity

The SEP IRA takes a simpler approach. There is only one contribution type.

• Employer contributions only: Up to 25% of net self-employment income (after the self-employment tax deduction), with a maximum of $70,000 per year (2025 limit).
• No employee deferral component
• No Roth option (all contributions are pre-tax)
• No loan provision
• Minimal administration: Open with a single form. No annual filing requirement until your balance exceeds $250,000.

The SEP IRA is the fastest retirement account to set up. You can open one and fund it in the same day, even after year-end (up to your tax filing deadline, including extensions).

The Key Differences That Matter

On paper, both accounts have the same $70,000 annual ceiling. In practice, the amount you can actually contribute depends on your income, and that is where the two accounts diverge significantly.

At Lower Income Levels ($80K to $150K): Solo 401(k) Wins

The Solo 401(k) has a massive advantage at lower and mid-range income levels because of the employee deferral. That $23,500 flat contribution is available regardless of how the 25% employer math works out.

With a SEP IRA, your only option is the 25% employer contribution. At $120,000 in net income, 25% gives you $30,000. With a Solo 401(k), you get that same $30,000 in employer contributions plus $23,500 in employee deferrals, for a total of $53,500.

That is a $23,500 difference in annual tax-sheltered savings from a single structural feature.

At Higher Income Levels ($280K+): They Converge

As your income rises, the 25% employer contribution grows, and the fixed $23,500 employee deferral becomes a smaller percentage of the total. Once your income reaches roughly $280,000, the 25% employer contribution alone reaches $70,000 (the overall cap), and both accounts max out at the same level.

At these income levels, the choice comes down to features (Roth option, loan access, simplicity) rather than contribution capacity.

Roth Option: Solo 401(k) Only

The Solo 401(k) lets you designate your employee deferral contributions as Roth. This means you pay taxes on the money now, but all future growth and withdrawals in retirement are completely tax-free.

If you believe your tax rate will be higher in retirement than it is today, or if you want tax diversification (some pre-tax funds, some Roth funds), this is a significant advantage. The SEP IRA has no Roth option at all.

Administration: SEP IRA Is Simpler

The SEP IRA requires almost no ongoing paperwork. You file IRS Form 5305-SEP when you set it up, and that is essentially it until your balance crosses $250,000.

The Solo 401(k) requires you to adopt a plan document and, once your plan assets exceed $250,000, file Form 5500-EZ annually with the IRS. It is not burdensome, but it is more than zero.

Employees: A Critical Fork in the Road

This is often the deciding factor. If you have full-time employees who are not your spouse, you generally cannot use a Solo 401(k). It is designed exclusively for owner-only (or owner-plus-spouse) businesses.

With a SEP IRA, you can have employees, but you must make equal percentage contributions for all eligible employees. If you contribute 25% of your income, you contribute 25% for every qualifying employee as well. This can get expensive quickly.

If you have a team, consult with a retirement plan specialist to evaluate options like a traditional 401(k) or SIMPLE IRA that may be more cost-effective.

Real Numbers: $120K Net Income Example

Let’s make this concrete. Assume you are a self-employed consultant with $120,000 in net self-employment income and you file in the 24% federal tax bracket.

SEP IRA at $120K

Component	Amount
Employer contribution (25% of net income)	$30,000
Total annual contribution	$30,000
Federal tax savings (24% bracket)	$7,200

Solo 401(k) at $120K

Component	Amount
Employee deferral	$23,500
Employer profit-sharing (25% of net income)	$30,000
Total annual contribution	$53,500
Federal tax savings (24% bracket)	$12,840

The difference: The Solo 401(k) lets you contribute an extra $23,500 per year and save an additional $5,640 in federal taxes. Over 20 years at a 7% return, that extra $23,500 per year compounds into approximately $964,000 in additional retirement wealth.

That is nearly a million dollars from choosing one account over the other. At this income level, the Solo 401(k) is the clear winner on pure contribution capacity.

When to Choose Each Account

Choose the Solo 401(k) if:

• Your net self-employment income is under $280,000
• You want to maximize contributions at every income level
• You want the option to make Roth (after-tax) contributions
• You want loan access for emergencies or opportunities
• You have no full-time employees (other than your spouse)
• You are comfortable with slightly more administrative work

Choose the SEP IRA if:

• You value simplicity above all else and want minimal paperwork
• Your income is above $280,000 (contribution limits converge with the Solo 401(k))
• You have employees and are willing to make equal contributions for them
• You want the fastest possible setup (can open and fund same day)
• Your income varies significantly year to year and you want zero commitment in lean years
• You are already running a Solo 401(k) in another business and want a separate, simpler account for a side venture

Consider Both (Yes, This Is Possible)

If you operate multiple businesses, you may be able to maintain a Solo 401(k) for one and a SEP IRA for another. The overall annual contribution limits still apply across all accounts, but the flexibility can be useful for managing different income streams. Work with a tax professional to structure this correctly.

Run the Numbers With Your Actual Income

The examples above use round numbers to illustrate the principles, but your situation has specifics that matter: your exact net income, your marginal tax bracket, your age, your state tax rate, and your retirement timeline.

Stashr’s Retirement Planning tool lets you model Solo 401(k) and SEP IRA scenarios side by side using your real business numbers. You enter your income, and the tool shows you the maximum contribution for each account type, the tax savings in the current year, and the projected retirement balance over time. No spreadsheets. No guesswork. Just clear answers for your specific situation.

The Most Important Thing

Choosing between a Solo 401(k) and a SEP IRA matters. But the biggest mistake self-employed business owners make is not choosing at all. Either account is dramatically better than leaving retirement savings on the table.

If you are earning $100,000 or more and contributing nothing to a retirement account, you are likely overpaying your taxes by $7,000 to $15,000 every single year while missing out on decades of tax-deferred compounding.

Pick the account that fits your situation. Fund it consistently. Let the math do the rest.

For the complete retirement planning picture, including defined benefit plans, HSAs, and the compounding math behind starting early, read our Retirement Planning Guide.

Your retirement contributions are also one of the most effective tax strategies available. See how they fit into the bigger picture in our Complete Tax Savings Guide.