Choosing between a SEP IRA and Individual 401k for Business owers

Frank Maurno |

SEP IRA vs. Solo 401(k): The Smart Choice for Small Business Owners, which one is right for you?

As a small business owner, have you delayed saving for retirement? Have you wanted to put more money away than your IRA allows but not sure about the best choice? Two of the top tools are the SEP IRA and Solo 401(k). Both offer high contribution limits and robust tax benefits, but choosing the right plan hinges on your business setup and personal retirement goals. 

Contribution Limits and Flexibility

For 2025, both plans let you save up to $70,000. But here’s the twist: SEP IRAs only allow contributions from the employer—up to 25% of compensation—making it harder to max out unless you have a high income. Solo 401(k)s let you save as both employee and employer, meaning you can contribute up to $23,500 as an employee (plus a $7,500 catch-up if you’re 50+) on top of the employer’s 25% of compensation. This edge makes Solo 401(k)s especially powerful for sole proprietors and freelancers.

Who Can Use Each Plan?

A SEP IRA is ideal if you have employees or want administrative ease—just set it up and contribute, with minimal paperwork and no annual IRS filings unless you add new employees.  All eligible employees must receive the same deferred % as you.  Solo 401(k)s, meanwhile, are only for businesses with no full-time employees other than a spouse. They require more paperwork, especially once assets pass $250,000 (then annual IRS Form 5500-EZ is a must).

Roth and Loan Options

Solo 401(k)s let you take loans from your account (up to $50,000 or 50% of your balance) and allow Roth contributions for tax-free growth—features SEP IRAs typically don’t offer.

Which Is Best for You?

Choose a Solo 401(k) for maximum savings, tax flexibility, and loan access—especially if you don’t have employees.

Opt for a SEP IRA if you’re prioritizing ease of use.

Conclusion

No matter your decision, both plans supply major tax advantages and help you accelerate retirement savings. Consider your income, business structure, and need for simplicity versus flexibility before choosing. Here’s a quick chart summarizing the key differences:

Feature

SEP IRA

Solo 401(k)

Max Contribution (2025)

25% of compensation, up to $70,000 

Up to $70,000 (under 50) 

Catch-up (50+)

None

$7,500 (total $77,500) 

Can have employees?

Yes, all must receive same % 

No, only for owners/spouses 

Employee contribution

Not allowed 

$23,500 elective; plus catch-up 

Roth option

Not available 

Available 

IRS annual reporting

Minimal 

Required for high balances 

 

There are more options not discussed above that may be a better fit for you.  We are available to review your situation to determine your best fit, feel free to reach out.