SEP IRA vs. Solo 401(k): Choosing the Best Plan for Self-Employed
Core Insights
- Savings Power: For many self-employed people, the Solo 401(k) allows significantly higher contributions than a SEP IRA at the same income level.
- Simplicity vs. Control: SEP IRAs are incredibly easy to set up. Solo 401(k)s require more paperwork but offer features like loans and Roth options.
- The “Employee” Rule: Solo 401(k)s are strictly for business owners with no full-time employees (except a spouse).
Self-employed professionals often struggle to decide how to maximize their retirement planning while staying tax-efficient. The SEP IRA and Solo 401(k) both offer strong benefits, but they differ dramatically in contribution limits, administrative complexity, and long-term flexibility.
“Quick Insight: At the same $100,000 net income, a Solo 401(k) can allow more than **double the contribution** of a SEP IRA because it lets you contribute as both the employee AND the employer.”
Contribution Potential: Visual Comparison
Below is a contribution comparison for a self-employed earner making $100,000 in net income. It highlights why many high-income freelancers choose the Solo 401(k) to accelerate tax-deferred savings.
Administrative & Contribution Rule Comparison
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Best For | Simplicity seekers or those with employees. | Solopreneurs wanting max tax savings. |
| Contribution Method | Employer profit sharing only (~20% of net). | Employee deferral + Employer profit sharing. |
| Admin Burden | Very Low (Start in minutes). | Moderate (EIN & Form 5500 may be needed). |
| Loans Allowed? | No. | Yes (up to $50k). |
Recommended Action Steps
1
Calculate Your Max Savings Goal
If you want to save more than $20,000 a year, run the numbers. The Solo 401(k) likely wins on pure math.
If you want to save more than $20,000 a year, run the numbers. The Solo 401(k) likely wins on pure math.
2
Check Your “Employee” Status
Do you plan to hire full-time staff soon? If yes, the Solo 401(k) might not be viable long-term. The SEP IRA scales better with employees.
Do you plan to hire full-time staff soon? If yes, the Solo 401(k) might not be viable long-term. The SEP IRA scales better with employees.
3
Assess Admin Tolerance
Are you willing to file an extra tax form (Form 5500) once your account hits $250,000? If not, stick to the SEP IRA for peace of mind.
Are you willing to file an extra tax form (Form 5500) once your account hits $250,000? If not, stick to the SEP IRA for peace of mind.
Frequently Asked Questions
Q. Can I switch between a SEP IRA and Solo 401(k)?
Yes. Many start with a SEP IRA for simplicity and upgrade to a Solo 401(k) as their income and savings goals grow.
Q. Does a Solo 401(k) always allow higher contributions?
In most cases, yes. The ability to make “employee deferrals” (up to $23,000 in 2024) gives it a huge head start over the SEP IRA’s percentage-only limit.
Q. Can I borrow money from these accounts?
Only the Solo 401(k) allows loans (up to 50% of the balance, max $50k). SEP IRAs do not permit personal loans.
Disclaimer: This content is for educational purposes only. Retirement plan rules are complex and subject to change. Consult a qualified tax professional or financial advisor before opening or funding a retirement plan.