SEP IRA vs. Solo 401(k): Which Retirement Plan Fits Your Business?
Once you’ve decided to start saving for retirement, the next question is: which plan should I choose?
Here’s how to think about it.
SEP IRA: Simple and flexible
Easy to open at most custodians - Vanguard or Fidelity get my vote!
Contribute up to 25% of your net self-employment income, up to $70,000 (2025). Contribution limit would be slightly different for a sole proprietor or a single member LLC taxed as sole proprietor) - effectively it is 20%.
You don’t have to contribute every year, which makes it ideal if your income fluctuates.
Employer-only contributions (no employee deferrals).
✅ Best for: solo business owners with unpredictable income or those who want simplicity over maximum savings.
Solo 401(k): Powerful and customizable
You wear two hats: employer + employee.
Employee deferral up to $23,500 (2025) + employer contribution up to 25% of compensation, for a combined limit of $70,000 (or $77,500 if age 50+).
Can include Roth contributions (tax-free growth later).
Slightly more paperwork (for example, IRS reporting is required when the account grows beyond $250,000) , but more savings (and tax deductions).
✅ Best for: business owners with steady profits who want to maximize contributions or include a Roth option.
Example
If your business nets $120,000 (as a sole proprietorship):
SEP IRA: You can contribute about $24,000 (20%).
Solo 401(k): You can contribute ~$23,500 employee + ~$24,000 employer = ~$47,500 total.
That’s a big difference.
While you can open these accounts on your own, working with a financial planner or tax professional can help you choose the right plan, handle paperwork, and make sure contributions align with your income and tax goals.
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