How the SEP IRA vs Solo 401(k) Comparison Works
This calculator compares the two most popular retirement plans for self-employed individuals and small business owners. Both plans offer significant tax advantages, but they work differently. Understanding these differences helps you choose the right plan for your situation.
SEP IRA (Simplified Employee Pension IRA)
A SEP IRA allows employers (including self-employed individuals) to contribute up to 20% of net self-employment income, with a maximum of $69,000 in 2025. Contributions are 100% employer-funded — you cannot make employee deferrals. This makes it simpler but potentially less powerful for those who want to maximize savings.
The 20% calculation is based on net earnings after deducting self-employment tax and the SEP contribution itself, which works out to approximately 20% of net income.
Solo 401(k) (Individual 401k)
A Solo 401(k) allows both employee deferrals and employer profit-sharing. In 2025, you can defer up to $23,500 as an employee (or $31,000 if age 50+), plus up to 25% of compensation as an employer profit-sharing contribution. The total cannot exceed $69,000 ($76,500 for age 50+).
Future Value Calculation
To project how your retirement savings will grow, we use the standard future value of an annuity formula. This assumes you make the same annual contribution each year and earn a consistent rate of return.
Tax Savings
Both plans reduce your taxable income in the year you contribute. Your annual tax savings equal your contribution multiplied by your marginal tax rate. A Solo 401(k) also allows Roth contributions (after-tax), which don't provide an upfront tax deduction but allow tax-free withdrawals in retirement.
Frequently Asked Questions
Which plan allows higher contributions: SEP IRA or Solo 401(k)?
Generally, the Solo 401(k) allows higher contributions because you can contribute both as an employee (up to $23,500 in 2025) and as an employer (up to 25% of compensation). A SEP IRA only allows employer contributions (up to 20% of net income). For higher earners, the Solo 401(k) can mean significantly more retirement savings each year.
Can I have both a SEP IRA and a Solo 401(k)?
No, you cannot have both for the same business. However, if you have separate businesses, you might be able to set up different plans for each. The combined annual additions across all defined contribution plans you sponsor cannot exceed the IRS limit ($69,000 in 2025). Most self-employed individuals choose one plan and maximize it.
Is a Solo 401(k) worth the extra paperwork compared to a SEP IRA?
For many self-employed individuals, yes. The Solo 401(k) allows you to save significantly more — potentially $30,000+ extra per year compared to a SEP IRA. The paperwork is minimal: one-time plan adoption, and annual Form 5500-EZ only if your plan assets exceed $250,000. If you want to maximize retirement savings, the Solo 401(k) is almost always worth the slight additional complexity.
Do SEP IRA contributions affect my Solo 401(k) limits?
Since you can't have both plans active simultaneously for the same business, this isn't typically a concern. However, if you're a W-2 employee with a 401(k) at work and also self-employed on the side, contributions to a SEP IRA for your side business could affect your ability to make Roth IRA contributions due to income limits. A Solo 401(k) for side income wouldn't affect Roth IRA eligibility the same way.
Can I make Roth contributions to a SEP IRA?
No, SEP IRA contributions are always pre-tax (traditional). You cannot designate SEP IRA contributions as Roth. If you want Roth treatment, you need a Solo 401(k) that offers a Roth option. With Roth Solo 401(k) contributions, you don't get an upfront tax deduction, but withdrawals in retirement are tax-free.
What happens if I hire employees? Can I keep my Solo 401(k) or SEP IRA?
Both plans can include employees, but the rules differ. A SEP IRA requires you to contribute the same percentage for all eligible employees. A Solo 401(k) is designed for owner-only businesses — once you hire non-spouse employees, you generally can't maintain a Solo 401(k) and would need to switch to a regular 401(k) plan. If you plan to hire employees soon, this may affect your choice.