The Success Guardian

Self-Employed Retirement Plans: Solo 401(k) vs. SEP IRA

If you run a one-person business (or a business with only you and a spouse), choosing the right retirement plan can make a big difference to your tax bill and your retirement savings. Two of the most common options are the Solo 401(k) and the SEP IRA. Both are powerful, but they serve slightly different goals.

“For many independent professionals, the decision comes down to flexibility versus simplicity,” says Jamie Smith, CFP. “Solo 401(k)s let you be aggressive with contributions and offer Roth options and loans. SEP IRAs are simple and low-cost, but they don’t give you the same employee-deferral features.”

Quick summary

• Solo 401(k): Best if you want higher potential contributions, a Roth option, or loan access. It works well if you have steady profits and want maximum flexibility.
• SEP IRA: Best if you want a simple, low-administrative plan and you don’t need Roth or loan features. It can be ideal for seasonal businesses or owners who prefer contributing only through employer profit-sharing.

How each plan works

Here are the basics in plain language:

• Solo 401(k)
  • Designed for business owners with no employees other than a spouse.
  • Has two contribution components: employee deferrals (what you elect to defer from your personal pay) and employer profit-sharing contributions.
  • Allows catch-up contributions (if you’re 50+), Roth elective deferrals in many plans, and plan loans (typically up to $50,000 or 50% of the plan balance).
  • May require Form 5500-EZ filing if plan assets exceed $250,000 at year-end.
• SEP IRA
  • Employer-funded—only the business contributes.
  • Contributions are discretionary and proportional for all eligible employees (if you have employees, you must contribute the same percentage of compensation for them as for yourself).
  • No Roth option, no loans, and no annual Form 5500 filing requirement.
  • Very simple to set up and maintain; contributions can be made up to your tax filing deadline (including extensions).

Contribution limits and realistic examples (2024 figures)

Below are the canonical limits for 2024. These are IRS-set caps and they matter a lot when you’re deciding which plan makes sense.

Plan feature	Solo 401(k)	SEP IRA
Employee elective deferral (2024)	Up to $23,000 (plus $7,500 catch-up if 50+)	Not available (employer-only)
Employer profit-sharing contribution	Up to combined plan limit (effectively up to ~25% of compensation; for self-employed calculation differs)	Up to 25% of compensation (effectively ~20% for self-employed after adjustments)
Total contribution limit (2024)	$69,000 (or $76,500 with catch-up)	$69,000 (employer-only)
Roth option	Often available (Roth elective deferrals)	Not available
Loans	Allowed (commonly up to $50,000 or 50% of balance)	Not allowed
Administrative burden	Higher if assets exceed $250,000 (Form 5500 filing)	Minimal (very little annual paperwork)

Important note: For self-employed people, the employer contribution isn’t a straight 25% of “net” profit; after IRS adjustments for self-employment tax and the fact that employer contributions reduce net earnings, the practical contribution rate ends up near 20% for many calculations. Solo 401(k) employer contributions follow similar rules but combined with employee deferrals allow much higher total contributions.

Concrete examples — how much could you save?

Numbers below are approximate to illustrate how the different formulas play out. They assume “net self-employment income” (after business deductions but before retirement plan contributions) and ignore state-specific taxes and some technical IRS adjustments for simplicity.

Net self-employment income	Approx. SEP IRA max contribution	Approx. Solo 401(k) max contribution
$75,000	~$15,000 (roughly 20% after adjustments)	$23,000 (employee deferral) + ~$15,000 employer ≈ $38,000
$150,000	~$30,000	$23,000 + ~$30,000 ≈ $53,000
$300,000	Capped by $69,000 limit (would hit cap before percent)	$23,000 + employer ≈ up to the $69,000 total cap

These examples show why Solo 401(k) often allows significantly higher tax-deferred savings for mid-to-high earners: the employee deferral component adds a large chunk up front, and the employer profit-sharing adds on top.

Pros and cons — at a glance

Which plan is better for your situation?

Ask yourself these quick questions:

• Do you want to maximize contributions each year and potentially use a Roth? Solo 401(k) often wins.
• Do you want the simplest possible plan with minimal paperwork? SEP IRA probably fits.
• Do you have employees (other than your spouse)? If yes, SEP requires proportional employer contributions for eligible employees; Solo 401(k) designs get more complex or may not be available if employees are present.
• Do you expect to need a short-term loan from your retirement plan? Then Solo 401(k) is the practical option.

“If cash flow is unpredictable, many owners choose a SEP because they can skip employer contributions in lean years,” explains Maria Lopez, small-business tax advisor. “But if your goal is the highest possible tax-deferral, the Solo 401(k) is hard to beat.”

How to set up and maintain each plan

Setup is straightforward but slightly different for each plan. Here’s a short checklist for each.

Solo 401(k) setup checklist

• Choose a provider (brokerage, bank, or recordkeeper) and select a Solo 401(k) plan document.
• Adopt the plan by completing provider paperwork and opening the plan account(s).
• Make employee deferrals during the year (generally by year-end) and employer contributions by your business tax filing deadline (including extensions).
• Track plan assets. If year-end balance exceeds $250,000, file Form 5500-EZ the following year.
• If you take a loan, follow the plan’s loan rules and document repayment.

SEP IRA setup checklist

• Complete IRS Form 5305-SEP (or use a provider’s pre-approved plan document).
• Set up an IRA account for each eligible employee or for yourself at a provider.
• Decide annually whether to contribute and how much (up to the percentage or dollar limit).
• Make contributions by your tax filing deadline (including extensions).

Tax and distribution notes

• Both plans are typically pre-tax (Traditional) unless you choose a Roth elective deferral for the Solo 401(k). Contributions reduce taxable income today and distributions are taxed later.
• Early withdrawals before age 59½ generally incur income tax plus a 10% penalty unless you qualify for an exception.
• Required minimum distributions (RMDs) apply when you reach the age specified by the IRS (this age has recently moved into the early-to-mid 70s; confirm current IRS guidance for your tax year).

Common questions

What if I sometimes hire employees?

If you have employees and you use a SEP, you must contribute the same percentage of compensation for eligible employees as you do for yourself. For a Solo 401(k), the plan is intended only for owner-only businesses (plus a spouse). If you add non-owner employees, you typically cannot maintain a Solo 401(k) for those employees.

Can I have both a Solo 401(k) and a SEP IRA?

Generally it’s not practical to run both for the same business—IRS rules limit total contributions across plans in some ways, and maintaining two employer plans increases complexity. It’s usually better to pick the one that fits your goals for the year.

How do taxes work when I contribute?

• Employer contributions (SEP or employer portion of Solo 401(k)) are deductible as a business expense, reducing taxable business income.
• Employee elective deferrals in a Solo 401(k) reduce the individual’s taxable wages and are reported on the owner’s personal tax return in the usual way for retirement deferrals.

Cost and provider considerations

Costs vary by provider. SEP IRAs often have minimal or no setup fees. Solo 401(k) providers sometimes charge a one-time setup fee plus annual maintenance fees—expect anywhere from $0 with discount brokers up to a few hundred dollars per year with some full-service providers. If you use a financial advisor, factor their fees in too.

Also consider investment choices and transaction costs—some low-cost brokerages provide broad mutual fund and ETF lineups with low fees, which can materially affect long-term returns.

Quick decision guide

• Choose Solo 401(k) if: you want to maximize contributions, need Roth or loan features, and are comfortable with a bit more paperwork.
• Choose SEP IRA if: you want the simplest option, have variable income, or you might have employees and want to avoid the Solo 401(k) restrictions.

Final thoughts and next steps

Both Solo 401(k)s and SEP IRAs are excellent tools for self-employed retirement planning. The right plan depends on your goals for tax savings, how much you want to put away, whether you need Roth or loan features, and how much administrative complexity you’re willing to accept.

Practical next steps:

• Estimate your expected business income and run the contribution scenarios above with your actual numbers or ask your CPA to compute the precise self-employed formulas.
• Talk to a provider about fees and whether the Solo 401(k) Roth and loan options are available.
• If you have employees, check eligibility rules carefully—both plans treat employees differently.
• Consider consulting a tax advisor or CFP to verify numbers and file deadlines for your situation.

“Small differences in plan rules can have a big impact on what ends up in your account each year,” notes Alex Chen, retirement strategist. “Do the math for two or three income scenarios—current year, a best year, and a lean year—then pick the plan that fits your priorities.”

Summary table — quick comparison

Feature	Solo 401(k)	SEP IRA
Best for	High contributions, Roth, loans	Simplicity and flexible employer-only contributions
Max contributions (2024)	$69,000 (or $76,500 with catch-up)	$69,000 (employer-only)
Roth option	Often yes	No
Loans	Usually allowed	Not allowed
Admin	Moderate to higher	Low

Choosing between a Solo 401(k) and a SEP IRA is less about which one is universally “better” and more about which fits your business and retirement goals. Run the numbers, consider administrative needs, and when in doubt, ask a qualified advisor to help tailor the decision to your exact situation.

If you’d like, tell me your approximate net self-employment income and whether you have employees (including a spouse), and I can run sample contribution numbers for you.

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