The Business Owner's Guide to Retirement: SEP IRA vs. Solo 401(k)

Most freelancers and business owners are so focused on building their business today that they’re completely neglecting their biggest client: their future self. Here’s the uncomfortable truth: when you work for yourself, no one is saving for your retirement except you. The 401(k) matching and pension plans of the corporate world are a distant memory. Going straight to the point, if you don’t have a dedicated retirement plan, you aren’t just behind—you’re on a direct path to working forever.

We’ve been taught to think of retirement saving as a luxury, something to get to “when the business is more stable.” But what most people don’t know is that the tax code provides incredibly powerful, yet criminally underused, tools specifically for the self-employed. The SEP IRA and the Solo 401(k) are not just savings accounts; they are financial engines designed to help you build massive, tax-advantaged wealth.

But what do we do? And here is where things get interesting. Choosing between these two plans is one of the most critical financial decisions an entrepreneur can make. One is brilliantly simple, a powerhouse of straightforward saving. The other is a sophisticated, flexible tool with features that can supercharge your savings and even provide access to capital. And this is just a very long way of saying that it’s time to stop leaving your future to chance and start acting like the savvy CEO your business needs you to be.

Why Your Old IRA Isn’t Enough: The Power of Scale

Before we compare the two giants, we need to understand why they exist. You might already have a Traditional or Roth IRA, and that’s a great start. But in 2025, the maximum you can contribute to those is $7,000 (or $8,000 if you’re over 50). For a business owner with significant income, that’s like trying to fill a swimming pool with a garden hose. It’s simply not enough to build a meaningful retirement nest egg.

To understand this, we need to go to the heart of the problem, which most people don’t know: as a business owner, you are both the employer and the employee. This unique dual role is what unlocks the massive contribution potential of plans like the SEP IRA and Solo 401(k). These plans allow you to make contributions on behalf of the “employer” (your business), which are far, far higher than what you can save as an individual. For 2025, the total contribution limit for these plans rockets up to $70,000. That’s not a typo. You can potentially save ten times more than in a regular IRA.

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The Simple Powerhouse: Demystifying the SEP IRA

The SEP (Simplified Employee Pension) IRA is exactly what its name implies: simple. Think of it as a traditional IRA on steroids, fueled by your business profits. It’s incredibly easy to set up—you can often open one online in minutes—and the administrative burden is almost nonexistent. There are typically no annual reporting requirements for the IRS, which is a huge plus for busy entrepreneurs.

Going straight to the point, with a SEP IRA, only the “employer” (your business) makes contributions. These contributions are limited to 25% of your compensation, up to a maximum of $70,000 for 2025. For a self-employed individual, “compensation” is effectively your net self-employment income after deducting one-half of your self-employment taxes. This 25% rule means that to hit the absolute maximum, you’d need to have a very high income. For example, to contribute the full $70,000, your compensation would need to be at least $280,000 ($280,000 * 25% = $70,000).

The beauty of the SEP IRA is its flexibility. Contributions are not mandatory. If your business has a lean year, you can contribute nothing at all. If you have a banner year, you can contribute the maximum. You can also establish and fund a SEP IRA for a given tax year up until your business’s tax filing deadline, including extensions. This gives you a powerful, last-minute tool to slash your tax bill while funding your future.

• Who it’s for: The freelancer or sole proprietor who wants a dead-simple, low-maintenance plan with high contribution limits. It’s the perfect “set it and forget it” option for getting serious about retirement saving.

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The Strategic Multitool: Unpacking the Solo 401(k)

This is where things get interesting. If the SEP IRA is a powerful sledgehammer, the Solo 401(k) is a sophisticated multitool. It’s designed exclusively for self-employed individuals with no employees (other than a spouse). While slightly more complex to manage, it offers a level of flexibility and power that the SEP IRA simply can’t match.

The funny thing is, the Solo 401(k) leverages your dual role as both “employee” and “employer” to potentially maximize your contributions even further.

1. As the “Employee”: You can contribute up to 100% of your compensation, with a maximum of $23,500 in 2025. If you’re age 50 or older, you can add a “catch-up” contribution of $7,500, for a total of $31,000.
2. As the “Employer”: On top of that, your business can make a profit-sharing contribution of up to 25% of your compensation.

The total combined contributions from both sides cannot exceed the overall limit of $70,000 for 2025 (or $77,500 with the catch-up). This dual-contribution structure means you can often save more in a Solo 401(k) than in a SEP IRA, especially at lower to moderate income levels.

But the advantages don’t stop there. The Solo 401(k) offers two game-changing features:

• The Roth Option: Most Solo 401(k) plans allow you to make your “employee” contribution as a Roth contribution. This means you contribute with after-tax dollars, but your investments grow completely tax-free, and qualified withdrawals in retirement are also 100% tax-free. This is a massive strategic advantage for anyone who believes their tax rate might be higher in the future.

• Participant Loans: Unlike any IRA, a Solo 401(k) can allow you to take a loan from your own account. You can typically borrow up to 50% of your vested balance, capped at $50,000, and you pay the interest back to yourself. This can be an invaluable source of capital for a personal emergency or even a business opportunity, preventing you from having to liquidate investments or take out a high-interest commercial loan.

• Who it’s for: The savvy business owner who wants to maximize contributions, desires a Roth option for tax diversification, and values the flexibility of a potential loan feature.

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Head-to-Head: SEP IRA vs. Solo 401(k) at a Glance

Let’s put them side-by-side to make the choice crystal clear.

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Making the Call: Which Plan is Right for You?

This sounds like a trade-off, but it’s actually about aligning the plan’s features with your specific business goals and financial situation.

Choose the SEP IRA if…

• Simplicity is your king. You want the easiest setup and the lowest possible administrative burden. You’re a “do-it-for-me” type who values efficiency over bells and whistles.
• Your income is consistently very high. If you’re earning well over $280,000, you can max out the plan with the simple 25% contribution and don’t need the complexity of the dual-contribution structure.
• You’re a master procrastinator. The ability to set up and fund the plan well into the next year, right up to your tax extension deadline, is a major advantage.

Choose the Solo 401(k) if…

• You want to save the absolute maximum. Especially if your income is under $200,000, the ability to make that upfront $23,500 “employee” contribution allows you to save a much higher percentage of your income.
• You want a Roth option. This is a non-negotiable. If you want tax-free growth and withdrawals in retirement, the Solo 401(k) is your only real choice. It’s a powerful tool for tax diversification.
• You want access to your money via a loan. The loan feature provides a critical safety valve and a source of liquidity that a SEP IRA simply cannot offer. It turns your retirement account into a more flexible financial asset.

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The Bottom Line: Stop Waiting and Start Building

And this is just a very long way of saying that as a business owner, your financial future is a direct result of the choices you make today. The tax code has handed you a gift in the form of these powerful retirement plans. Failing to use them isn’t just a missed opportunity; it’s a strategic error that could cost you decades of financial freedom.

Whether you choose the elegant simplicity of the SEP IRA or the strategic flexibility of the Solo 401(k), the most important step is to choose one and start. You get the gist: the difference between a comfortable retirement and a stressful one is not the performance of your business next year, but the structure you put in place for yourself right now.

This article is for educational purposes only and should not be considered personalized legal or financial advice. Contribution limits and rules can change. Consider consulting with a financial advisor and a certified public accountant (CPA) for guidance specific to your situation.

SEP IRA vs. Solo 401(k) FAQ

What is the main difference between a SEP IRA and a Solo 401(k)?

The main difference lies in the contribution structure. A SEP IRA only allows for ‘employer’ contributions (up to 25% of compensation). A Solo 401(k) allows for both ‘employer’ contributions AND ‘employee’ contributions, which often lets business owners save more, especially at lower income levels. The Solo 401(k) also offers a Roth option and the ability to take loans, which a SEP IRA does not.

Can I contribute more to a Solo 401(k) than a SEP IRA?

Yes, in many cases. Because the Solo 401(k) allows for both an employee contribution (up to $23,500 in 2025) and an employer contribution (up to 25% of compensation), you can often contribute more than with a SEP IRA, which is limited to the 25% employer contribution. This is especially true for those with moderate self-employment income.

Which plan is better if I want a Roth option?

The Solo 401(k) is the clear winner. Most Solo 401(k) plans allow you to make your ‘employee’ contributions as Roth (after-tax) contributions, allowing for tax-free growth and tax-free withdrawals in retirement. While recent legislation allows for a Roth feature in SEP IRAs, it is not yet widely available or required.

Can I take a loan from my retirement plan?

You can if you have a Solo 401(k) that allows for it. Most Solo 401(k) plans permit you to borrow up to 50% of your account balance, capped at $50,000. SEP IRAs do not allow for participant loans under any circumstances.

Which plan is easier to set up and manage?

The SEP IRA is generally considered simpler. It has minimal paperwork to set up and no annual reporting requirements. A Solo 401(k) is slightly more complex and requires you to file Form 5500-SF annually once your plan assets exceed $250,000.