Solo 401(k) or SEP IRA: Which Plan Fits Your Business?

The Points That Actually Decide the Comparison

Who Has to Be Covered

A SEP IRA requires you to contribute the same percentage of pay for every eligible employee that you contribute for yourself. A solo 401(k) is only available to a business with no eligible employees other than the owner and, in some plans, a spouse. These two rules are the single most important thing to know before choosing a plan, and we address them fully in the section on hiring below.

Whether Roth Contributions Are Available

A solo 401(k) can include a Roth deferral option, depending on the plan document. A SEP IRA does not allow Roth contributions. For an owner who expects to be in a higher tax bracket later, or who wants tax-free income in retirement, the Roth option is a meaningful difference and worth factoring into the decision before the account is opened.

Loans Against the Plan Balance

A solo 401(k) may allow a loan against the plan balance, subject to the plan document's terms. A SEP IRA does not. Whether this matters depends on your situation, but it is a feature that disappears if you choose the SEP and later wish you had it.

Setup and Contribution Deadlines

This is the most consequential difference for someone sitting across the table from us in filing season. A SEP IRA can generally be established and funded for a closed tax year up to the return's due date including extensions, which means it is often the only plan still available in March or April. A solo 401(k) must generally be established by the end of the tax year for which you want to make deferral contributions, though the employer contribution piece runs on a different clock. The owner who did not open a solo 401(k) before December 31 usually cannot go back and do it for that year.

Annual Reporting Once the Plan Grows

A solo 401(k) requires an annual information filing once plan assets exceed a threshold set by the IRS. A SEP IRA carries no comparable filing requirement. This is not a reason to avoid the solo 401(k), but it is an administrative reality that shows up as the plan matures and should be part of the conversation.

The Deadline Section: Why This Conversation Belongs in the Fall

The timing rules are why a tax preparer gets asked about retirement plans more than almost any other planning question. By the time most owners ask, one of their options is already gone.

What Is Still Available After the Year Closes

March is late for this conversation. It is not always too late. A SEP IRA can generally still be established and funded for a tax year that has already closed, up to the return's due date including extensions. That makes it the plan a person can still act on in the spring. A solo 401(k) deferral, on the other hand, needed a decision before the calendar year ended. The owner sitting across from us in filing season usually has one plan still on the table and one that required a choice last year.

Why the Good Version of This Conversation Happens in October

When we talk through the plan options in the fall, both plans are still available, the year's income is coming into focus, and there is time to open the account and fund it before any deadline closes. That is the version of this conversation where the contribution actually reaches its potential. The fall planning conversation is where the plan decision is still fully open — and where the deduction lands on the return rather than getting left on the table.

What Happens When You Hire Someone

Hiring changes the plan. Better to know that before the first hire, not after. This section is the one most comparison articles skip, and it is the one that matters most once your business starts to grow.

How a SEP Changes When You Add Employees

A SEP IRA requires you to contribute the same percentage of pay for every eligible employee that you contribute for yourself. The flexible benefit that worked well as a one-person shop becomes a payroll cost that scales with your crew. If you contributed 20 percent for yourself in a good year, you owe 20 percent for every eligible employee that year. For a contractor with seasonal workers, or any business where income swings with the job schedule, this can turn a retirement contribution into an unplanned labor expense.

How a Solo 401(k) Changes When You Add Employees

A solo 401(k) stops being a solo plan once there is an eligible employee other than a spouse. The plan does not simply expand to cover employees — you would generally need to convert to or establish a different plan type. The plan that fit a one-person shop is not the plan that fits a crew, and the transition point arrives faster than most owners expect when they set up the account.

What a SIMPLE IRA Offers Once You Have Staff

A SIMPLE IRA is worth a full look for a business that already has employees, because it is designed for that situation. Employees can defer their own pay into the plan, which means the retirement benefit does not rest entirely on the employer contribution. The required employer contribution is smaller as a percentage than a SEP at the top end. The setup window falls earlier in the year rather than at filing, so this is a plan that requires a decision before the calendar year begins. There is also a holding-period rule that penalizes early rollovers out of a SIMPLE IRA, which matters if you think you might switch plan types in the next two years. A SIMPLE IRA fits a small crew where the owner wants employees to be able to contribute without running a full 401(k).

When a Traditional or Roth IRA Is the Right Starting Point

When business income is modest, a traditional or Roth IRA is often the floor worth establishing before any employer plan. The contribution limit is lower, but the plan is simple to open, carries no employer obligations, and the Roth version builds tax-free. It is worth asking whether this is the right starting point before committing to a more complex plan structure.

When a Defined Benefit or Cash Balance Plan Enters the Picture

At the high end, a defined benefit or cash balance plan allows contributions that far exceed what a SEP or solo 401(k) permits. These plans are designed for a high-income owner with a shorter runway to retirement who wants to put away the largest possible deductible amount. The actuarial requirements and annual administration costs are real, so the question of whether this type of plan makes sense depends on income level, age, and how long the business will operate in its current form. If that description fits your situation, it is worth a conversation.

How the Contribution Is Actually Calculated for a Self-Employed Owner

The limit in the article and the limit on your return are two different numbers. Here is why, and why it matters before you open anything.

The published contribution percentage for a SEP IRA — and the employer contribution percentage for a solo 401(k) — is applied to net earnings from self-employment after the deduction for half of self-employment tax, not to the profit shown on the business return. For an unincorporated owner, the effective ceiling comes out lower than the headline percentage suggests. As an illustration: an owner with $100,000 in net profit does not figure the contribution on $100,000. The self-employment tax deduction reduces the base first, and the contribution itself further reduces net earnings in the IRS's calculation, which is why the math requires iteration rather than a single multiplication.

For an owner taking a W-2 wage from an S corporation, the calculation runs differently. The employer contribution is figured on the W-2 wage rather than on self-employment earnings, which means the wage decision and the retirement plan decision are the same decision. Setting the wage lower reduces the contribution ceiling. Setting it higher increases the payroll tax cost. How the entity is structured sets the compensation the contribution is figured on, and those two decisions belong in the same conversation.

We will run this on your actual figures before you open anything. A bigger cap only matters if your income reaches it, and the right plan is the one that works on your numbers, not the headline number.

Where the Deduction Shows Up on the Return

For an unincorporated owner, the retirement plan contribution is generally deducted as an adjustment on the personal return, reducing adjusted gross income directly. For employees participating in the plan, their deferrals run through payroll and reduce their W-2 wages. The employer contribution for employees is generally deductible as a business expense on the business return. Running employee deferrals through payroll correctly matters — both for the deduction and for the plan's compliance with its own terms.

Contribution Limits — 2025 Tax Year

These figures apply to the 2025 tax year and are sourced from the IRS cost-of-living adjustment announcement. Every figure here should be verified against the current IRS announcement before publishing and updated once each year at rollover. Any figure that cannot be confirmed against that source has been omitted.

• Solo 401(k) employee deferral limit: $23,500
• Catch-up contribution, age 50 and over: $7,500 (total deferral $31,000)
• Enhanced catch-up, ages 60–63: $11,250 (total deferral $34,750, in place of the standard catch-up)
• Combined annual limit (employee + employer contributions): $70,000, or $77,500 with standard catch-up, or $81,250 with the 60–63 enhanced catch-up
• SEP IRA maximum contribution: Lesser of 25% of compensation (as defined for SEP purposes) or $70,000
• Compensation cap for SEP percentage calculation: $350,000
• SIMPLE IRA employee deferral limit: $16,500
• SIMPLE IRA catch-up, age 50 and over: $3,500
• SIMPLE IRA enhanced catch-up, ages 60–63: $5,250
• Traditional and Roth IRA contribution limit: $7,000
• Traditional and Roth IRA catch-up, age 50 and over: $1,000 (total $8,000)

All figures are illustrations of the published limits. Your actual deductible contribution depends on your net earnings, entity structure, and how the contribution base is calculated for your specific situation.

A Note on What We Do and What the Plan Provider Does

Our role in this is the tax side: helping you choose among the plan types, running the contribution and deduction math on your actual figures, making sure the contributions land on the return correctly, and keeping you ahead of the setup and funding deadlines. The account itself is opened and held wherever you choose — a brokerage, a bank, or a plan provider of your preference. Where the money is invested, how a portfolio is built, and what the account earns are decisions that belong with the account custodian, not with us. We work the tax side of the decision. They work the investment side.

Frequently Asked Questions