SEP IRA vs Solo 401(k) for self-employed owners

Summary

Sources: IRS Publication 560, IRS retirement plan limits (annually indexed), DOL fiduciary guidance.

Educational only — not tax, legal, or investment advice. Confirm rates, thresholds, and forms with IRS.gov and a licensed CPA or enrolled agent for your facts.

Self-employed taxpayers without employees (other than a spouse) commonly choose between a SEP IRA and a Solo 401(k) (individual 401(k)). Both defer tax on retirement savings, but flexibility, limits, and administrative burden differ materially.

1. Feature comparison

Feature	SEP IRA	Solo 401(k)
Who can adopt	Self-employed, small employers	Owner-only businesses (± spouse)
Employee deferrals	No—employer contributions only	Yes—elective deferrals up to IRS limit
Catch-up (age 50+)	Not in SEP itself	Extra deferral allowed in 401(k)
Roth option	No	Plan-dependent
Setup complexity	Low—brokerage form	Moderate—plan document, Form 5500-EZ if assets high
Deadline to establish	Typically by tax filing deadline	Usually by Dec 31 of tax year

2. Contribution mechanics (conceptual)

SEP: Up to 25% of net earnings from self-employment (with a compensation definition tied to Schedule SE), capped by the annual IRS limit.

Solo 401(k): Employee elective deferral (salary reduction from net earnings) plus employer profit-sharing (often 25% of net earnings), combined subject to the overall annual addition limit.

3. Numeric illustration

Net earnings from self-employment $100,000 (simplified):

Plan	Illustrative max direction
SEP IRA	~$25,000 employer share (before annual IRS cap)
Solo 401(k)	Deferral up to employee limit + employer share, often higher total

Exact numbers require the IRS compensation definition and inflation-adjusted caps—recompute each tax year.

4. When SEP wins

• You want minimal paperwork and no annual deferral decisions.
• You may hire W-2 employees soon—SEP scales to staff with proportional contributions.
• You prefer a single contribution at tax time.

5. When Solo 401(k) wins

• You want Roth tax diversification.
• You need catch-up deferrals after age 50.
• You want to maximize savings at moderate net earnings via employee deferral.

6. Deadlines and pitfalls

Missing the Solo 401(k) establishment deadline means waiting until next year. Excess contributions trigger excise tax until corrected. SEP contributions must follow uniform allocation if employees exist.

Official sources

• IRS — Small Business & Self-Employed
• IRS — Forms & Publications

Retirement planning intersects with S-Corp wages and QBI—model all three with a fiduciary advisor.