SEP-IRA vs Solo 401(k): Which Retirement Plan Wins?
In the SEP-IRA vs Solo 401(k) choice, pick a Solo 401(k) if you want to save the most or add Roth money, and pick a SEP-IRA if you want the simplest setup. Both are tax-advantaged retirement plans built for self-employed people and small-business owners.
The big difference is how you fund them. A SEP-IRA uses employer contributions only.
A Solo 401(k) lets you add an employee deferral on top of an employer contribution, so it often lets you save more at the same income.
SEP-IRA vs Solo 401(k): Side-by-Side
| SEP-IRA | Solo 401(k) | |
|---|---|---|
| Who can contribute | Employer only (the business funds it) | You as employee plus you as employer |
| 2025 maximum | $70,000 | $70,000 ($77,500 if age 50+) |
| Employee salary deferral | Not allowed | Up to $23,500 in 2025 (plus catch-up if 50+) |
| Roth option | No | Yes, Roth deferrals allowed |
| Works if you have employees | Yes, but you must fund the same % for all eligible staff | No, owner and spouse only (no other full-time staff) |
| Setup and admin | Very simple, no annual IRS form | More paperwork, Form 5500-EZ once assets top $250,000 |
| Plan loans | Not allowed | Allowed if the plan permits |
Which should you choose?
Choose a Solo 401(k) if you are owner-only and want to save the most, add Roth dollars, or borrow from the plan. Choose a SEP-IRA if you value the simplest possible setup or you have employees you must cover.
At modest income, the Solo 401(k) usually wins because its flat employee deferral lets you contribute far more than a SEP-IRA's 25% cap.
How the SEP-IRA vs Solo 401(k) funding rules differ
The core split in the SEP-IRA vs Solo 401(k) debate is who puts money in. A SEP-IRA is funded by the business only. You can contribute up to 25% of your compensation, capped at $70,000 in 2025.
A Solo 401(k) works in two layers. First, you make an employee salary deferral of up to $23,500 in 2025. Second, the business adds a profit-sharing contribution. Together they can reach the same $70,000 cap.
That second layer is why the accounts behave so differently at lower incomes. See our 401(k) vs Roth IRA guide for how deferrals fit a wider plan.
Why a Solo 401(k) lets you save more at modest income
At a modest income, a Solo 401(k) usually lets you contribute more than a SEP-IRA. This is the non-obvious tradeoff many people miss.
Here is a simple decision rule. Suppose you earn $60,000 in net self-employment income. A SEP-IRA caps you near 25% of pay, roughly $15,000. A Solo 401(k) lets you defer $23,500 as the employee first, then add the employer share on top.
So the same person can save far more in the Solo 401(k). The SEP-IRA only catches up at high incomes, where both plans hit the $70,000 ceiling. Model your gap with our retirement savings calculator.
Roth, loans, and paperwork: the features that break the tie
A Solo 401(k) offers Roth contributions and loans, while a SEP-IRA offers neither. If you want tax-free growth through Roth dollars, the Solo 401(k) is the only choice here.
A Solo 401(k) can also let you borrow from the plan if the document permits it. A SEP-IRA never allows a loan.
The cost is more admin. Once your Solo 401(k) assets pass $250,000, you must file Form 5500-EZ each year. A SEP-IRA has no such annual filing, which keeps it simple.
When a SEP-IRA is the better pick
A SEP-IRA is the better pick when you want the simplest plan or you have employees. It takes minutes to open and has almost no ongoing paperwork.
The employee rule is the key limit. A Solo 401(k) is for owner-only businesses, meaning you and a spouse with no other full-time staff. If you hire a full-time employee, the Solo 401(k) no longer fits.
A SEP-IRA still works with employees. But you must contribute the same percentage of pay for every eligible worker, which can get expensive. If you'd rather offer a full workplace plan, compare setups in our best small-business 401(k) providers roundup. Compare account types in our brokerage vs IRA guide.
How to choose between a SEP-IRA and a Solo 401(k)
To choose in the SEP-IRA vs Solo 401(k) decision, start with two questions: do you have employees, and how much do you want to save? Your answers point to one plan.
If you have non-spouse full-time employees, the Solo 401(k) is off the table, so use a SEP-IRA. If you are owner-only and want to maximize savings, add Roth money, or borrow, choose the Solo 401(k).
If you are owner-only but want zero paperwork and earn enough to hit the 25% cap anyway, the SEP-IRA is a clean fit. Check your overall picture with our net worth tracker.
Frequently asked questions
Can I contribute more to a SEP-IRA or a Solo 401(k)?
You can usually contribute more to a Solo 401(k), especially at modest income. Both cap at $70,000 in 2025, but the Solo 401(k) adds a $23,500 employee deferral on top of the employer share. That flat deferral lets you save more than a SEP-IRA's 25% limit until your income is high enough to max both.
Does a SEP-IRA allow Roth contributions?
No, a SEP-IRA does not allow Roth contributions. Only a Solo 401(k) lets you make Roth deferrals for tax-free growth. If Roth savings matter to you, the Solo 401(k) is the plan that offers them.
Can I use a Solo 401(k) if I have employees?
No, you cannot use a Solo 401(k) if you have non-spouse full-time employees. A Solo 401(k) is for owner-only businesses, including a spouse who works in the business. If you have other full-time staff, use a SEP-IRA instead, and you must fund the same percentage for each eligible worker.
What are the 2025 SEP-IRA and Solo 401(k) limits?
For 2025, both plans cap total contributions at $70,000. A Solo 401(k) also allows a $23,500 employee deferral within that cap, plus a catch-up that raises the ceiling to $77,500 for those age 50 or older. A SEP-IRA is limited to 25% of compensation up to the $70,000 cap.
Which plan is simpler to set up and run?
A SEP-IRA is simpler to set up and run. It opens in minutes and has no annual IRS filing. A Solo 401(k) needs more paperwork and requires Form 5500-EZ once plan assets exceed $250,000, though it offers Roth and loan features a SEP-IRA lacks.
Can I switch from a SEP-IRA to a Solo 401(k)?
Yes, you can switch from a SEP-IRA to a Solo 401(k) if you are owner-only. Many self-employed savers move to a Solo 401(k) to add Roth dollars or to contribute more at modest income. Ask your provider about rolling SEP-IRA balances and check the timing rules for the year of the switch.
Free calculators to help you decide
Sources
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