Best Retirement Plan for Solopreneurs: SEP IRA or Solo 401(k)?

As a solopreneur, you wear all the hats. CEO, marketer, accountant, and sometimes even IT support. But when it comes to planning for retirement, the biggest challenge isn’t just finding the time—it’s choosing the right plan.

For self-employed individuals and small business owners with no employees (except maybe a spouse), the two best retirement plan options are the SEP IRA and the Solo 401(k). Each comes with tax advantages, flexible contribution limits, and the ability to grow your wealth for the future. But which one is right for you?

Let’s break it down.

The SEP IRA: Simple and Scalable

A Simplified Employee Pension Individual Retirement Account (SEP IRA) is a tax-advantaged retirement plan designed for self-employed individuals and small business owners. It functions similarly to a traditional IRA but allows for much higher contribution limits.

Pros of a SEP IRA:

✅ High Contribution Limits – You can contribute up to 25% of your net self-employment earnings, up to a max of $69,000 in 2024.
✅ Easy to Set Up – No annual filing requirements or complex paperwork. Open an account with a brokerage, fund it, and you’re good to go.
✅ Tax Deductible Contributions – Contributions reduce your taxable income, lowering your overall tax bill.
✅ No Income Limits – Unlike Roth IRAs, there’s no income cap restricting contributions.

Cons of a SEP IRA:

❌ Employer-Only Contributions – You contribute as the "employer," not as an "employee." This means no separate elective deferrals like a 401(k) allows.
❌ No Roth Option – All contributions are pre-tax, meaning withdrawals in retirement are taxed as income.
❌ Less Flexibility for Catch-Up Contributions – Unlike a Solo 401(k), SEP IRAs do not allow additional catch-up contributions for those 50 and older.

The Solo 401(k): The Power Player

A Solo 401(k) (also called an Individual 401(k)) is designed for self-employed individuals and business owners with no employees (except a spouse). It offers many of the same benefits as a traditional employer-sponsored 401(k) but tailored for solopreneurs.

Pros of a Solo 401(k):

✅ Higher Potential Contributions – In 2024, you can contribute:

• $23,000 as an “employee” (plus an extra $7,500 if you’re over 50).
• 25% of your business earnings as an “employer.”
• Combined max: $69,000 ($76,500 if over 50) – same as SEP but more flexible.
  ✅ Roth Option Available – You can contribute to a Roth Solo 401(k) with after-tax dollars, allowing tax-free withdrawals in retirement.
  ✅ Loans Allowed – Some Solo 401(k) plans allow you to borrow up to $50,000 from your account.
  ✅ Personalized Investment Options – Depending on the provider, Solo 401(k) plans may allow alternative investments like real estate and private equity.

Cons of a Solo 401(k):

❌ More Administrative Work – If your balance exceeds $250,000, you must file Form 5500 annually with the IRS.
❌ Slightly More Complex to Set Up – Unlike a SEP IRA, a Solo 401(k) requires a plan document and more paperwork upfront.
❌ No Employees Allowed – If you plan to hire full-time employees in the future, you’ll need to switch to a traditional 401(k).

Side-by-Side Comparison: SEP IRA vs. Solo 401(k)

Which One is Right for You?

• Choose a SEP IRA if you want a low-maintenance plan with high contribution limits but don’t need a Roth option or employee salary deferrals.
• Choose a Solo 401(k) if you want to maximize contributions, have the option for Roth savings, and don’t mind a little extra paperwork.

What If You Hire Employees?

If your business grows and you hire full-time employees, the SEP IRA requires equal contributions for all employees (which can get expensive), while a Solo 401(k) is no longer an option (you’d need to upgrade to a regular 401(k) plan).

Final Thoughts

Both the SEP IRA and Solo 401(k) offer powerful tax advantages, but the best choice depends on how much flexibility and control you want. If simplicity is your priority, go with a SEP IRA. If you want more tax-planning strategies and the ability to contribute more aggressively, the Solo 401(k) is the better bet.

Either way, making consistent contributions to one of these plans is a huge step toward financial freedom in retirement.

Need help setting up the right plan? Let’s talk.

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