Solo 401(k) Vs SEP IRA: Which Is Better?

The solo 401(k) and SEP IRA are tax-advantaged plans that can help small businesses provide valuable retirement savings benefits for their workers. Both allow you to save similar amounts of money each year, but they differ in some key ways, and you’ll want to carefully compare them to see which plan works best for your situation.

Key differences between the solo 401(k) and the SEP IRA

Just 28 percent of businesses with fewer than 10 employees have a retirement plan, according to 2019 data from SCORE, a nonprofit advisor to small businesses. The solo 401(k) and SEP IRA are plans that can help fill this gap, helping small businesses provide for their workers. Here’s how they differ.

Contribution rates

With a self-employed 401(k), you can save up to $23,500 in 2025 in your plan as an employee deferral, just as you would in a regular 401(k). Since you’re also the employer, you’re able to make an employer contribution to the account, as much as 25 percent of the business’s income, up to a total account value of $70,000 for 2025.

With a SEP IRA, you can set aside up to 25 percent of your business’s income, up to $70,000 in 2025.

Contribution limits

Despite similar limits on annual contributions, the solo 401(k) can help you save more quickly. The SEP IRA allows you to save 25 percent of your income in the account. In contrast, with a solo 401(k), you can save up to 100 percent as an employee contribution, up to the annual threshold, and then you can flip to employer contributions at up to a 25 percent rate.

This 401(k) feature is especially valuable if you’re working a side gig in addition to your primary job and you can set aside cash at a higher rate. However, remember that your annual maximum contribution limit applies to your total contributions across all your 401(k) accounts.

Catch-up contributions

The solo 401(k) allows participants 50 and older to make catch-up contributions to the account — $7,500 in 2025. Those age 60 to 63 can make even higher catch-up contributions of $11,250. The SEP IRA does not have this feature. This bonus can really help out higher earners who are looking to stash away more cash and cut their tax bill.

Employee participation

With the exception of a spouse who works in your business, the solo 401(k) will not work for a business with employees. If that’s the case, then you may turn to the SEP IRA, which allows you to establish a plan for multiple employees. If you’re setting up a plan for your employees, you’ll also want to compare the SEP IRA against the SIMPLE IRA to see which works better.

How solo 401(k)s work

Think of the solo 401(k) as a 401(k) just for yourself — or you and a spouse, if you’re the only two employed in your business. It can provide the benefits of a typical 401(k) plan: tax breaks, tax-deferred growth, tax-free growth if you opt for a solo Roth 401(k) — and you can actually score some bonus perks, too, allowing you to stash even more cash in your plan.

One attractive trait of the solo 401(k) is that your employee contribution is not limited to a percentage of your pay. That is, you can immediately contribute all your salary to the plan up to the annual maximum. Then you can make employer contributions at the 25 percent rate. This setup allows you to quickly stack money into your solo 401(k) plan.

You can set up your solo 401(k) to make contributions on a pre-tax basis like a traditional 401(k). You’ll avoid taxes on contributions and be taxed only when you withdraw money. Alternatively, you can contribute after-tax funds while enjoying tax-free growth and withdrawals like a Roth 401(k). You’ll want to understand the key differences between these two 401(k) plans.

If you’re contributing to multiple 401(k) plans — say through your main employer and then your own business — your employee contributions for all plans top out at the annual maximum. But the solo 401(k) does allow you to make employer contributions, meaning you can save more. That employer contribution also reduces your business taxes, even as you save for retirement.

How SEP IRAs work

The SEP IRA takes the idea of the IRA and stretches it to meet the needs of freelancers, business owners and others who have employees. SEP stands for simplified employee pension, and it allows an employer (including the self-employed) to make contributions to employees’ retirement plans, giving them a way to save for retirement through their employer.

This plan can be particularly advantageous for the self-employed. Even if you have a 401(k) at your main employer, you can contribute to a SEP if you’re self-employed, making it an attractive way for freelancers to stash extra money. Like a solo 401(k), you can have a Roth SEP IRA.

While its contribution limit is higher, the SEP IRA is subject to the same investment, distribution and rollover rules as a traditional IRA, including rules on early withdrawals, which lead to a 10 percent penalty tax, and required minimum distributions on traditional SEP IRAs by age 73.

If there’s a serious snag with the SEP IRA, however, it’s that you must treat everyone in the program the same. If you provide 5 percent of the company’s income to yourself, you also need to do so for any employees who qualify for the program. So, while a SEP IRA lets you stash the cash as a sole proprietor, it might be a less attractive option as your business grows.

The SEP IRA does not allow catch-up contributions if you’re 50 or over, so if that’s a deal-breaker, the SEP IRA won’t be for you. However, you have flexibility in making contributions and don’t have to make one in any given year. If a rough patch hits, you can suspend contributions until things improve.

Bottom line

With similar annual contribution limits, the solo 401(k) and SEP IRA might seem nearly the same, but the 401(k) may be the better option for single freelancers. The solo 401(k) allows you to save at a much faster rate in the account, though it’s viable only for single-person businesses (or with a spouse in the business). Both types let you save in attractive after-tax Roth accounts, too.