Strategic retirement planning is crucial for anyone to ensure a comfortable retirement, but arguably even more so for small business owners, independent contractors, and self-employed workers. It’s one more area of control and responsibility, with managing your retirement savings ranking just as high as managing your business.
However, establishing a retirement plan can be challenging for small business owners, requiring time, the right tools, and, most importantly, the knowledge to make the right choice. A significant 40 percent of small business employers don’t offer a retirement savings plan. Many struggle to retain and motivate employees, hindering both business growth and retirement savings—so something has to change.
Get your head start. Weigh the benefits of a self-directed Solo 401(k) versus SEP individual retirement account (IRA) for your small business and begin your journey with minimal overhead.
Comparing a Solo 401(k) vs. SEP IRA
A Solo 401(k) and simplified employee pension (SEP) IRA are each popular because they are quicker to establish, less expensive, and easier to manage compared to a conventional 401(k)—all of which is beneficial to smaller businesses.
To set up these plans, you must have an established small business. The IRS regulates both, and there are important differences between a Solo 401(k) and a SEP IRA. Familiarize yourself with each to decide the optimal retirement savings plan for your needs.
The Key Difference Between a Solo 401(k) vs. SEP IRA
For many, choosing between a 401(k) and SEP IRA comes down to contribution limits, flexibility, and tax responsibilities. (We’ll get to those shortly.) But before you even think about any of this, ask yourself if your business qualifies for these plans.
Who It’s For
As a small business, you already meet the first criterion. But just how small are you? This is crucial because a Solo 401(k) only caters to business owners with no full-time employees other than themselves or their spouses. By contrast, self-employed individuals and small businesses with full-time employees are eligible for a SEP IRA.
Eligibility for participation in a SEP IRA is quite inclusive, and businesses are required to include all eligible employees in the plan. Eligible employees include all those who:
- Are at least 21 years old.
- Have been employed by the same company for at least three of the last five years.
- Have received at least $750 in compensation from the employer in 2025 and 2024.
Solo 401(k) vs. SEP IRA Contributions
As you choose between a Solo 401(k) versus SEP IRA, you’re also selecting between the types of contributions and who is responsible. These factors may impact potential savings over time.
Solo 401(k) Contributions
Contributing to a Solo 401(k) is unique because the business owner plays two roles: employee and employer. As a result, contributions to the plan are permitted in both capacities.
One of the advantages of this plan is its Roth IRA component. Not all providers offer this feature, so research potential plans thoroughly to select one that will allow you to start enjoying tax-free growth.
SEP IRA Contributions
In a SEP IRA, the contributions are made by an employer—although it's important to note that those contributions do not affect how much you can contribute to an IRA on your own behalf. A SEP IRA is a type of Traditional IRA, so you may be able to make regular annual IRA contributions, eliminating the need to open a separate Traditional IRA.
Thanks to Section 601 of the SECURE Act 2.0, you can designate your employer profit-sharing contributions as a Roth SEP or Roth SIMPLE IRA. Custodians continue to update their agreements to include Roth language to support this.
Maximum Contribution Limits
Official maximum contribution limits have increased for 2025 and beyond. Retirement plan contributions are limited to self-employment income, with required taxable minimum distributions beginning at age 73. Carefully weigh your options to make an informed decision aligned with your financial goals and circumstances.
Solo 401(k) Contributions
How much you can put away with a Solo 401(k) is age-based. For individuals under 50, the combined total of employee and employer contributions for Solo 401(k) plans is $70,000 per year, with employee deferrals maxing out at $23,500. For individuals 50 or over, Solo 401(k) plans allow for additional catch-up contributions of $7,500 per year.
SEP IRA Contributions
Similarly, SEP IRAs offer high contribution limits compared to other IRAs. Under this plan, you can potentially contribute up to 25 percent of your compensation or $70,000. Still, the maximum is greater with a Solo 401(k) plan because of the employee contribution component.
Considerations for Starting a Solo 401(k)
If you’re a one-person show, a Solo 401(k) retirement plan is the perfect fit—and you can bring your spouse along if they work for the business. Enjoy higher contribution limits compared to a SEP IRA with the combined employee and employer contributions.
Tax Implications
What does your current and future tax picture look like? A Solo 401(k) can be funded with pre- or post-tax dollars, and your responsibilities could make a difference in how you manage your plan.
A pre-tax Solo 401(k) contribution allows you to reduce your taxable income for the year the contribution is made. You won't pay taxes on contributions until you withdraw funds in retirement. On the other hand, a post-tax or Roth 401(k) contribution is made with after-tax dollars. And although the tax break isn't immediate, your investment earnings and qualified withdrawals in retirement are tax-free.
Borrowing
If you need to borrow from your retirement funds, a Solo 401(k) lets you do so, up to the lesser of 50 percent of your vested balance or $50,000. Loans are a unique differentiator for Solo 401(k) plans, as you cannot borrow from a SEP IRA.
As a best practice to avoid default, pay back the loan at least quarterly. Loan offset may be rolled over, but try not to borrow from your Roth and after-tax accounts.
Unrelated Debt-Financed Income (UDFI) Exemption
When a self-directed IRA buys real estate using a non-recourse loan or mortgage, it creates unrelated debt-financed income (UDFI), adding to your taxable income. Fortunately, a Solo 401(k) plan permits you to use a non-recourse loan without being subject to the UDFI rules. If you’re eyeing real estate investments, this provides significant tax advantages.
Considerations for SEP IRA
SEP IRAs are equal across the board for investors. When you offer this plan, all eligible employees—including the business owner—must receive the same percentage of employer-funded contributions. This also means seniors don’t get extra perks, as SEP IRAs don’t offer catch-up contributions for those 50 and older. Before committing to a SEP IRA, consider the financial implications of this retirement account.
Funding Contributions
The biggest hurdle for many is that SEP IRA contributions are entirely employer-funded. You must contribute the same percentage to all eligible employees' accounts, including your own. Consider your size and financial outlook to determine if this option is feasible.
Still, you don’t have to make contributions every year. If your business is struggling financially, you may be able to reduce or even suspend SEP IRA contributions without penalty.
Combining a 401(k) with a SEP IRA
Ordinarily, you would have to choose between a Solo 401(k) and SEP IRA because your business cannot have both plans. In fact, if you're self-employed and contribute to your own SEP IRA, you can't have a 401(k) of any type for the same business. But there is one loophole.
If you work for another employer at a second job, you can likely contribute to both their 401(k) and your small business SEP IRA. In this case, the contribution limits would apply to each.
Take Your Pick Between a Solo 401(k) vs. SEP IRA
Picking your side in the Solo 401(k) versus SEP IRA debate depends on your business, income, and desired retirement savings contributions. If your business has employees, a SEP IRA is ideal for its higher contributions over regular IRA limits and tax-deductible contributions. Still, solopreneurs tend to enjoy the higher contribution limits, pre- and post-tax options, and support for both employer and employee contributions that only a Solo 401(k) can provide.
Still feeling unsure of which road to take? Whether you opt for a Solo 401(k) or SEP IRA, your retirement plan provider plays a pivotal role. Turn to IRAR Trust to get personalized guidance and weigh the potential benefits of each option.
With nearly 30 years of experience, IRAR helps investors build retirement wealth with alternative investment options and low fees—and we’re here to help you. Schedule your free consultation to build your dream portfolio and become financially free in retirement.
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