SEP-IRA vs Solo 401(k): Which Retirement Plan Is Right for Your Business?

You're self-employed and want to save for retirement while reducing your tax bill. Great instinct.

But should you open a SEP-IRA or a Solo 401(k)? They sound similar, and both let you contribute significant amounts—but the details matter.

The short answer: For most self-employed individuals, the Solo 401(k) offers more flexibility and higher potential contributions. But SEP-IRAs are simpler and work better in certain situations. Let's break it down.

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The Basics: What Each Plan Offers

SEP-IRA (Simplified Employee Pension)

A SEP-IRA is essentially a supercharged IRA for self-employed individuals. Your business makes contributions on your behalf—you can't contribute as an employee.

Key features:

• Employer contributions only (no employee contributions)
• Contribution limit: Up to 25% of net self-employment income
• Maximum: $69,000 for 2026
• Tax treatment: Traditional (tax-deferred) only
• No loans allowed

Solo 401(k) (Individual 401k)

A Solo 401(k) is a full 401(k) plan for self-employed people with no employees (except a spouse). You can contribute as both employer AND employee.

Key features:

• Employee + employer contributions
• Employee contribution limit: $23,500 for 2026
• Total contribution limit: $69,000 for 2026
• Catch-up contributions for 50+: Additional $7,500
• Roth option available
• Loans allowed (up to $50,000)

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Contribution Limits Compared

This is where the Solo 401(k) really shines for many people.

2026 Contribution Limits

Plan Type	Employee Contribution	Employer Contribution	Total Maximum
SEP-IRA	$0	25% of compensation	$69,000
Solo 401(k)	$23,500	25% of compensation	$69,000
Solo 401(k) (50+)	$31,000	25% of compensation	$76,500

Why This Matters

With a SEP-IRA, your contribution is limited to 25% of your net self-employment income. If you earn $100,000, you can contribute about $18,587 (after the self-employment tax adjustment).

With a Solo 401(k), you can contribute that same $18,587 as an employer contribution PLUS $23,500 as an employee contribution—$42,087 total.

Real Numbers Example

Self-employed consultant, net income: $150,000

SEP-IRA maximum: Net self-employment income × 25% = ~$27,880

Solo 401(k) maximum:

• Employee contribution: $23,500
• Employer contribution: ~$27,880
• Total: $51,380

The Solo 401(k) lets you shelter nearly $24,000 more per year.

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The Roth Option

Here's a game-changer: Solo 401(k) plans can include a Roth option. SEP-IRAs cannot.

Why Roth Matters

Traditional (SEP-IRA and Solo 401k traditional):

• Contributions reduce your taxable income NOW
• Pay taxes when you withdraw in retirement

Roth (Solo 401k only):

• Contributions don't reduce current taxable income
• Withdrawals in retirement are TAX-FREE

When to Choose Roth

Consider Roth contributions if:

• You expect higher tax rates in retirement
• You're in a relatively low tax bracket now
• You want tax diversification
• You've maxed out other tax-deferred options

The Split Strategy

With a Solo 401(k), you can do both:

• Employee contributions can be traditional OR Roth (or split)
• Employer contributions must be traditional
• Mix and match based on your tax situation

SEP-IRA? All traditional, all the time.

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Loans: Sometimes You Need the Money

Life happens. Sometimes you need access to your retirement funds.

SEP-IRA Loans

Not allowed. If you need money from your SEP-IRA before retirement, you'll pay taxes plus a 10% early withdrawal penalty (with some exceptions).

Solo 401(k) Loans

Allowed. You can borrow up to $50,000 or 50% of your vested balance (whichever is less).

Loan terms:

• Must repay within 5 years (15 years for home purchase)
• Pay interest—but you pay it to yourself
• Payments aren't tax-deductible
• Missed payments can trigger taxes and penalties

Why This Matters

Having access to your retirement savings as a loan gives you flexibility without triggering taxes. It's not ideal to borrow from retirement, but it's nice to have the option in emergencies.

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Simplicity vs. Flexibility

SEP-IRA: Maximum Simplicity

Setup:

• Fill out IRS Form 5305-SEP
• Open account at any brokerage
• Done in 30 minutes

Annual maintenance:

• No annual filing requirements
• No plan documents to maintain
• Just make contributions by the tax deadline

Best for:

• People who want dead-simple setup
• Those with inconsistent income (can skip years easily)
• Business owners who might hire employees later

Solo 401(k): More Flexibility, More Paperwork

Setup:

• Adopt a plan document (from your provider)
• Set up account at a brokerage that supports Solo 401(k)s
• Takes a bit longer, but still manageable

Annual maintenance:

• File Form 5500-EZ if plan assets exceed $250,000
• Maintain plan documents
• Track contributions carefully

Best for:

• People who want to maximize contributions
• Those who want Roth option
• Business owners who might need loan access

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Which Has Better Investment Options?

Both plans can be opened at most major brokerages and offer similar investment options:

• Individual stocks
• ETFs and mutual funds
• Bonds
• REITs
• And more

No significant difference in investment flexibility. Choose your provider based on fees and features, not investment options.

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What If You Have Employees?

This is crucial: Solo 401(k) plans are only for businesses with no employees (except your spouse).

If you hire even one employee (other than your spouse), you can no longer use a Solo 401(k). You'd need a regular 401(k), which has additional costs and requirements.

SEP-IRA With Employees

You can maintain a SEP-IRA with employees, but you must contribute the same percentage for all eligible employees as you do for yourself.

If you contribute 25% for yourself, you contribute 25% for them too. This gets expensive.

Growing Your Business?

If you might hire employees soon:

• SEP-IRA can continue (but gets costly)
• Solo 401(k) must be terminated or converted to a regular 401(k)
• Consider your growth plans when choosing

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Contribution Deadlines

SEP-IRA

• Contributions due by tax filing deadline (including extensions)
• File extension → contribution deadline extends too
• Can decide contribution amount after year ends

Solo 401(k)

Employee contributions:

• Due by December 31 of the tax year
• No extensions

Employer contributions:

• Due by tax filing deadline (including extensions)
• Same flexibility as SEP-IRA

The catch: To make employee contributions for a given year, your Solo 401(k) must be established by December 31 of that year.

Planning to open a Solo 401(k) in April for last year's taxes? You can still make employer contributions, but you've missed the employee contribution window.

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Side-by-Side Comparison

Feature	SEP-IRA	Solo 401(k)
Max contribution (2026)	$69,000	$69,000 ($76,500 if 50+)
Employee contributions	No	Yes ($23,500)
Roth option	No	Yes
Loans	No	Yes (up to $50,000)
Catch-up contributions	No	Yes ($7,500 at 50+)
Setup complexity	Very easy	Moderate
Annual filing	None	5500-EZ if >$250K
Employees allowed	Yes (must cover them)	No (except spouse)
Establishment deadline	Tax deadline	Dec 31 for employee contrib

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Which Should You Choose?

Choose SEP-IRA If...

• You want the simplest possible option
• You might hire employees and want flexibility
• Your income is low enough that 25% covers your contribution goals
• You don't need Roth or loan options
• You're deciding late in the year or after year-end

Choose Solo 401(k) If...

• You want to maximize contributions
• You're over 50 and want catch-up contributions
• You want the Roth option for tax diversification
• You might need loan access
• You definitely won't have employees (except spouse)
• You can plan ahead and establish by December 31

Many People Do Both (At Different Times)

It's common to start with a SEP-IRA for simplicity, then convert to a Solo 401(k) as income grows and you want more contribution room.

You can even roll your SEP-IRA into your Solo 401(k) to consolidate accounts.

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Getting Started

SEP-IRA Setup

1. Download Form 5305-SEP from IRS.gov
2. Open a SEP-IRA account at any major brokerage (Fidelity, Schwab, Vanguard, etc.)
3. Make contributions by tax deadline

Solo 401(k) Setup

1. Choose a provider (Fidelity, Schwab, and E*TRADE offer free Solo 401(k)s)
2. Complete their plan adoption agreement
3. Open the account
4. Make contributions according to the deadlines

Tip: If it's late in the year and you want employee contributions, act fast. You need the plan established by December 31.

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The Bottom Line

For most self-employed DFW professionals earning solid income, the Solo 401(k) is the better choice. Higher contribution limits, Roth option, and loan access give you flexibility that SEP-IRAs can't match.

But if simplicity is your priority or you're just starting out, there's nothing wrong with a SEP-IRA. You can always upgrade later.

Not sure which makes sense for your situation? Let's look at your numbers and find the option that maximizes your tax savings.

Not sure which plan fits your situation? Let's run the numbers →

— Krystal Le, CPA

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LeCPA helps self-employed professionals across Plano, Richardson, Frisco, and Dallas with tax planning and retirement strategies.