If you're self-employed or own a small business with no full-time employees (other than your spouse), setting up a retirement plan can feel like another overwhelming item on your to-do list. But here’s the good news: you’ve got great options, and two of the most popular are the SEP IRA and the Solo 401(k).
Each has its strengths. And the best choice for you will depend on how much you want to contribute, whether you have employees, and how much paperwork you’re willing to deal with.
Let’s break it down in a side-by-side comparison so you can see which one fits your business.
SEP IRA
When choosing between a SEP IRA and a Solo 401(k) in 2025, it’s all about your business setup and how much flexibility you want. A SEP IRA is great for self-employed individuals and small business owners with no or few employees. It’s easy to set up, requires minimal paperwork, and lets you contribute up to 25% of your compensation, maxing out at $70,000 for 2025. However, it only allows employer contributions - there’s no option for employee deferrals, Roth contributions, or catch-up contributions for those over 50. It’s also important to note that if you have employees, you must contribute equally for them.
Solo 401(k)
On the flip side, a Solo 401(k) offers more features for those with no employees other than a spouse. It allows both employee and employer contributions, with a total contribution limit of $70,000, plus an additional $7,500 if you are age 50-59 or age 64 or older for a total of $77,500. Those between the ages of 60 and 63 can have an aggregate contribution up to $81,250. Here is a breakdown:
Employee Contribution:
- Individuals can contribute up to $23,500 as an employee.
Catch-up Contributions:
- Individuals aged 50 to 59, or 64 or older, can contribute an additional $7,500.
- Individuals aged 60 to 63 can contribute an additional $11,250
Employer Contribution:
As an employer, you can contribute up to 25% of your compensation (after Social Security and Medicare Taxes). The IRS limits the amount of compensation to $350,000.
It also includes Roth contribution options and the potential for loans. That said, it comes with a bit more administrative work, especially if the plan exceeds $250,000 in assets (requiring Form 5500 each year). The deadline to set up a Solo 401(k) is December 31 of the tax year, while SEP IRAs can be opened by your tax-filing deadline, including extensions.
Real-World Example
Ava is a 45-year-old freelance marketing consultant who earns $120,000 a year and has no employees. She wants to maximize her retirement savings. A Solo 401(k) allows her to contribute both as an employee and employer, up to the full $70,000 limit, giving her more bang for her buck compared to a SEP.
Carlos, a 50-year-old business owner with one part-time employee, is looking for something easy. He sets up a SEP IRA, makes contributions only as the employer, and appreciates the low-maintenance setup, though he knows he’ll have to contribute a proportional amount for his employee, too.
Which One Should You Choose?
Choose a SEP IRA if:
- You want something simple and easy to set up.
- You don’t want to deal with ongoing paperwork.
- You don’t need catch-up contributions or Roth options.
- You may hire employees in the future and want a plan that you can expand.
Choose a Solo 401(k) if:
- You want to contribute more aggressively, especially with catch-up or Roth contributions.
- You’re planning to retire early and like the idea of borrowing from the plan.
- You’re okay with a bit more paperwork in exchange for more flexibility.
Not sure which plan fits your business best?
Let’s map out your retirement savings strategy together. Whether you're building your business solo or planning for future hires, we’ll help you make a tax-smart decision that aligns with your goals. CLICK HERE to schedule an appointment.