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

Retirement Accounts That Reduce Your Taxes

If you're self-employed, retirement contributions are one of the most powerful ways to lower your tax bill.

Two of the best options are the SEP IRA and the Solo 401(k).

SEP IRA: Simple and Flexible

• Contribute up to 25% of net self-employment income
• No employee contributions (employer-only)
• Easy to set up, minimal paperwork
• Deadline to establish and fund: tax filing deadline (including extensions)

Best for: Sole proprietors or single-member LLCs who want simplicity.

Solo 401(k): More Control

• Both employee and employer contributions allowed
• Higher total contribution limits for many income levels
• Option for Roth contributions (after-tax, tax-free growth)
• Loan provisions available
• Must be established by December 31 of the tax year (unlike a SEP IRA, which can be set up at filing)

Best for: Self-employed individuals with no employees who want to maximize contributions.

The Key Difference

At lower income levels, the Solo 401(k) often allows larger contributions because of the employee deferral component.

At higher income levels, the SEP IRA may catch up or the difference shrinks.

Which Should You Choose?

Consider:

• How much you want to contribute
• Whether you want Roth options
• How much administrative effort you're willing to handle

Bottom Line

Both are excellent tools. The right one depends on your income, goals, and how much you want to set aside.

Either way, not using one is leaving tax savings on the table.