Self-employed individuals looking to save for retirement have two powerful options—the SEP IRA vs the Solo 401(k)—designed to offer high contribution limits and maximize retirement savings.
Each plan has unique features that could make one more appealing to you, depending on your situation.
In this article, we will walk you through the differences so you can decide which is right for you.
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What is the SEP IRA vs. the Solo 401(k)?
The SEP IRA and the Solo 401(k) are retirement savings options designed specifically for self-employed individuals or small business owners.
The Solo 401(k), commonly referred to as the Individual 401(k), offers the flexibility of contributing as both an employer and an employee, maximizing retirement savings and tax benefits.
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On the other hand, the SEP IRA is like an upgraded Individual Retirement Arrangements (IRA) but designed for self-employed individuals like freelancers, independent contractors, and other business owners.
“SEP” stands for Simplified Employee Pension, which allows employers to contribute to their own retirement savings as well as those of their employees.
This provides a path for owners and their employees to build their retirement funds through their businesses.
Both plans allow you to save similar amounts of money each year, but they differ in several ways.
When it comes to a SEP IRA vs a Solo 401(k), you should review them carefully to determine which is right for you.
Difference #1: Contributing More Money to Retirement at Lower Income Levels
The SEP IRA and Solo 401(k) have a similar maximum contribution limit of $70,000 as of 2025.
Individuals over 50 can make an additional catch-up contribution of $7,500 to their retirement plans.plans.
However, the amount of income you earn limits your contribution.
The SEP IRA allows you, as the employer, to contribute up to 25% of your compensation to your retirement account. However, with this plan, you can only contribute as an employer.
This means that you would have to earn roughly $276,000 to contribute close to the maximum of $70,000.
However, the Solo 401(k) allows you to contribute more money at a lower income level.
You can defer up to 100% of your income into a 401(k) plan up to the maximum contribution limit for employees, which is $23,500 for 2025, or $31,000 for individuals over the age of 50.
Then, as an employer, you could contribute another 25% of your total compensation from your business, just like you would in a SEP IRA.
Therefore, a self-employed individual with $184,000 in income would qualify for the maximum contribution despite earning nearly $100,000 less in income.
Take note, your total maximum contribution (as an employer and employee) on a solo 401(k) plan is limited to $70,000 as of 2025, or $77,500 for individuals above the age of 50.
Difference #2: Ease of Setup and Ongoing Maintenance
When it comes to setting up and maintaining a retirement plan, you may be interested in choosing one with the least amount of complexity.
The Solo 401(k) is subject to a higher level of scrutiny, which includes annual filing requirements, additional fees, and other rules.
Once your account has over $250,000, you should file extra forms yearly. (Not filing a form could lead to huge penalties of up to $150,000.)
If you want to simplify your tax filing process and reduce the number of concerns you have at tax time, the SEP IRA may be the better option for you.
With SEP IRAs, there are no annual filing requirements with the IRS, and they are widely known for their ease of set up and maintenance over time.
Difference #3: Time to Fund the Account
In general, you have until the tax filing deadline to set up your retirement plan for the prior tax year.
For example, if it is March of 2025, you could still set up and fund a retirement plan for 2024 even though the tax year has already ended.
This is very beneficial for business owners because it allows them to carefully make their contribution after assessing how their business performed for the year.
However, one key difference with a Solo 401(k) is that only employer contributions can fund the account after the tax year has ended.
If you wish to utilize the employee contribution for your Solo 401(k), you should fund it before the tax year ends, or before December 31st.
Otherwise, your Solo 401(k) contribution will be limited to the 25% employer contribution for that tax year, similar to a SEP IRA.
You can fund SEP IRAs after the tax year ends.
The main point here is that both of these plans allow you to fund the account after year-end, except for employee contributions with a Solo 401(k).
Difference #4: Number of Employees
A Solo 401(k) retirement plan is exclusively intended for self-employed individuals or business owners without any employees, except for a spouse actively involved in the business operations.
If your company employs individuals other than your spouse, the Solo 401(k) cannot be utilized.
Under such circumstances, you might explore the SEP IRA as an alternative, which enables you to establish a retirement plan encompassing multiple employees.
However, if your objective is to create a plan specifically tailored for your employees, it would be wise to consider the SEP IRA to identify the most suitable option for your business.
How to Open a SEP or Solo 401(k)
Opening a SEP IRA or Solo 401(k) is pretty straightforward. Most brokerages offer them, and you can usually set one up online.
Many will handle the paperwork and there’s often no fee to open or maintain the account. Just make sure you open it by your tax filing deadline (usually mid-April) to get tax breaks for that year.
Be aware of any minimum investment requirements and the types of investments you can make.
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Bottom Line
As someone who is self-employed, you are responsible for your own retirement savings.
Deciding between a SEP IRA vs a Solo 401(k) can be challenging.
Fortunately, you have tax-advantaged methods available to help you save wisely.
Since there is not a one-size-fits-all savings strategy, you can consult a financial advisor or a CPA to determine which approach is best for you.
Contact us today to get started.
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