SEP IRA vs. Solo 401(k): Which Retirement Plan Is Better for the Self-Employed?
SEP IRA vs. Solo 401(k): Which Retirement Plan Is Better for the Self-Employed?
It’s estimated that nearly 17 million Americans are self-employed. If you’re one of them, you may be wondering how to effectively contribute to a retirement plan. After all, you can’t just sign up for your companies 401(k) plan.
Of course, you can simply contribute to an IRA or Roth IRA; but if you’re only doing that, you’re likely leaving a lot of potential retirement contributions on the table. These individual retirement accounts have very low annual contribution limits in comparison to other options.
Two common options worth your consideration are the SEP IRA and the Solo 401(k). Both offer meaningful tax advantages and the ability to save far more than a traditional IRA or Roth IRA, but they operate very differently under the hood.
Understanding those differences can help you maximize contributions, optimize taxes, and build long-term wealth more efficiently.
The Basics
A SEP IRA (Simplified Employee Pension) is designed to be a straightforward, low-maintenance retirement plan for self-employed individuals and small business owners. Contributions are made by the employer only, even when that employer is you.
A Solo 401(k) – sometimes called an individual 401(k)—is designed specifically for business owners with no employees (other than a spouse). It allows you to act as both the employer and the employee, which opens the door to more flexible and often higher contributions.
Contribution Structure: Where the Differences Really Matter
This is where the Solo 401(k) tends to stand out. With a SEP IRA, contributions are limited to employer contributions only, generally up to 25% of compensation (with some nuances depending on business structure). There are no employee salary deferrals.
With a Solo 401(k) on the other hand, you get two layers of contributions:
Employee (salary deferral) contributions
Employer contributions
It may be odd to think of yourself as your own employee, but nevertheless, the Solo 401(k) allows you to do just that. That combination can significantly increase how much you’re able to save—especially at lower income levels.
For example, as the “employee,” you can contribute a fixed dollar amount (subject to annual IRS limits), and then as the “employer,” you can still add a percentage of your income on top of that. This dual structure is one of the biggest advantages of the Solo 401(k).
Why this matters:
If your income fluctuates or is on the lower-to-mid range, the Solo 401(k) often allows you to contribute more than a SEP IRA would.
Pre-Tax vs. Roth Flexibility
Another major advantage of the Solo 401(k) is tax diversification. With a SEP IRA, contributions are pre-tax only. This reduces your taxable income today, but all withdrawals in retirement are taxed as ordinary income.
With a Solo 401(k), you can typically choose between:
Pre-tax contributions (like a SEP IRA), or
Roth contributions (after-tax, with tax-free growth potential and withdrawals in retirement)
This flexibility is incredibly valuable for long-term planning. If you expect your tax rate to be higher in the future—or simply want to diversify your tax exposure—a Solo 401(k) gives you options that a SEP IRA does not.
With tax brackets likely to be higher in the future (See my article https://www.everest-wealthadvisors.com/blog/taxes-glance-will-they-be-higher-or-lower-10-years), having the option to build a Roth bucket for retirement can save you significant amount in taxes during your retirement.
Ease of Setup and Administration
So far, the Solo 401(k) is in the lead with the ability to contribute both salary deferral and employer contributions, as well as the ability to contribute both Traditional and/or Roth contributions.
What about setting it up and maintaining it? This is where the SEP IRA shines.
A SEP IRA is one of the easiest retirement plans to set up and maintain. It has minimal paperwork, no annual filings (in most cases), and easy to fund.
A Solo 401(k), while not overly complex, does require more involvement:
Plan documents must be established
Some custodians have more limited investment flexibility
Once plan assets exceed a certain threshold, annual filings (such as IRS Form 5500-EZ) are required
If simplicity and minimal administrative burden are your top priorities, the SEP IRA has a clear edge.
Contribution Deadlines and Flexibility
Both plans offer flexibility, but in slightly different ways.
A SEP IRA allows you to make contributions up until your tax filing deadline (including extensions). This can be extremely useful if you’re trying to reduce taxable income after the year has ended.
A Solo 401(k) requires that employee salary deferrals be elected by year-end, though employer contributions can still be made up until the tax filing deadline.
If you tend to make decisions late in the tax season, a SEP IRA may give you more flexibility. However, if you plan ahead, the Solo 401(k) still provides plenty of opportunity.
A Quick Example
Let’s say you’re self-employed and earning $100,000.
With a SEP IRA, your contribution is limited to roughly 20–25% of that income. So, for the sake of this example, let’s say it’s $22,000 (Note: The actual contribution limit is determined by an IRS formula based on net self-employment income and is slightly reduced due to self-employment tax adjustments).
With a Solo 401(k), you could make a salary deferral contribution and layer on an employer contribution. As of this year (2026), the maximum salary deferral contribution for a Solo 401(k) is $24,500, or $32,500 if you’re over 50.
So, a 55-year-old business owner with a Solo 401(k) can contribute $54,500 in this example ($32,500 salary deferral + $22,000 employer contribution), while the 55-year-old with a SEP IRA is stuck at $22,000.
Even if the Solo 401(k) investor only partially contributes a salary deferral, the point is they are able to contribute more. If this happens every year, the compounded difference over time will be significant in terms of taxes saved and the size of their retirement portfolio.
Bottom Line:
Both the SEP IRA and Solo 401(k) are excellent retirement savings tools for the self-employed. The right choice ultimately depends on your priorities.
If you want simplicity and ease, the SEP IRA is hard to beat.
If you want flexibility, higher contribution potential, and Roth options, the Solo 401(k) is the more powerful tool.
For many self-employed individuals, the decision comes down to a simple tradeoff: convenience vs. control. In many cases, the added flexibility of a Solo 401(k) is well worth the extra effort.
One last thing to keep in mind. Participating in either a Solo 401(k) or a SEP IRA doesn’t stop you from also contributing to an Individual Traditional or Roth IRA. If you really want to pour as much as possible into your retirement, consider doing both (subject to income limits).
Are you self-employed and want to explore your best option? Give me a call or send me an email or text.
Everest Wealth Advisors is a wealth advisory firm that helps individuals, families, and business’s navigate complex financial decisions through personalized, goal based planning and disciplined investment strategies.
Ryan Page, CFP®, MBA®
Office & Text:720-826-1092
Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
Investing involves risk including loss of principal. No strategy assures success or protects against loss.
This is a hypothetical example and is not representative of any specific situation. Your results will vary.
