Solo 401(k) vs SEP IRA
Both let self-employed people shelter far more than an IRA allows. Which one wins depends mostly on your profit level and whether you have employees.
The structural difference
A SEP IRA has one contribution type: an employer contribution, calculated as a percentage of your net self-employment earnings. That is the whole plan. Simple to open, simple to run, and the amount you can put in scales strictly with profit.
A Solo 401(k) has two. You contribute as the employee — an elective deferral that does not depend on a percentage of profit — and then again as the employer, as a share of earnings. Stacking the two is why it usually shelters more.
The practical upshot: at modest profit the Solo 401(k) typically allows a much larger contribution, because the elective deferral is not limited by a percentage. As profit climbs, the SEP's percentage-based contribution catches up and the gap closes.
Side by side
| Solo 401(k) | SEP IRA | |
|---|---|---|
| Contribution types | Employee deferral + employer share | Employer share only |
| Best at | Low to moderate profit | High profit, or wanting simplicity |
| Employees allowed | No (owner and spouse only) | Yes — but you must fund theirs at the same rate |
| Roth option | Usually available | Traditionally pre-tax only |
| Loans | Often permitted | Not permitted |
| Admin burden | Higher — extra IRS filing once assets grow past a threshold | Very low |
| Opening deadline | Stricter for deferrals | Typically up to the filing deadline, extensions included |
Contribution limits, thresholds, and catch-up provisions are adjusted annually and depend on your entity type and net earnings. Confirm the current year’s figures with the IRS or your CPA before contributing — do not rely on a number from an article.
How to choose
Lean Solo 401(k) if:
- Your profit is modest and you want to shelter as much of it as possible.
- You want a Roth option for tax-free growth.
- You have no employees and do not plan to hire.
- You want the ability to borrow from the plan.
Lean SEP IRA if:
- Your profit is high enough that both reach similar contribution levels anyway.
- You value minimal paperwork over squeezing out the last dollar of contribution room.
- You have or expect employees — a Solo 401(k) stops being available.
- It is already past year end and you need something you can still open.
Why this matters more than it looks
These contributions reduce your taxable income in the year you make them, which means the account is doing two jobs at once: building retirement savings and lowering your current tax bill. For someone already paying 15.3% self-employment tax on top of income tax, that second job is worth real money.
Run your own numbers with the Solo 401(k) Calculator, then see the effect on what you owe in the Self-Employment Tax Calculator. If you are still working out how to get money out of the business in the first place, start with how to pay yourself.
General information, not tax or investment advice. Retirement plan rules are detailed and change; confirm specifics with a CPA or the IRS before acting.
Frequently asked questions
Which lets me contribute more, a Solo 401(k) or a SEP IRA?
At lower and moderate incomes, the Solo 401(k) — often by a wide margin. It allows an employee-style elective deferral on top of an employer profit-sharing contribution, while a SEP IRA only allows the employer-style percentage of compensation. At high income both eventually reach the same overall cap, so the advantage narrows and disappears as profit rises.
Can I have a Solo 401(k) if I have employees?
Generally no. A Solo 401(k) is designed for an owner (and a spouse working in the business) with no other full-time employees. Once you hire eligible employees you move into standard 401(k) territory with the associated testing and administration, or you use a SEP IRA, which does allow employees but requires you to contribute the same percentage for them as for yourself.
Does a Solo 401(k) have a Roth option?
Yes — most Solo 401(k) providers allow Roth elective deferrals, so you can contribute after-tax money that grows tax-free. Traditional SEP IRAs have historically been pre-tax only, though rules have been changing. If tax-free growth matters to you, that flexibility is a real point in the Solo 401(k)’s favor.
Can I still open one for last year?
A SEP IRA is the more forgiving of the two here — it can typically be established and funded up to your tax filing deadline including extensions. Solo 401(k) plans have stricter establishment timing rules for the elective deferral portion. If you are reading this after year end and have not opened anything, ask a CPA which is still available to you.