Solo 401(k) vs. SEP-IRA: Which Saves More?

If you’re self-employed, you have access to retirement plans that put the best corporate 401(k)s to shame. The two most common options — the Solo 401(k) and the SEP-IRA — both allow contributions well above what W-2 employees can save. But they work differently, and the difference matters.

How a SEP-IRA works

A SEP-IRA is simple. You contribute up to 25% of your W-2 compensation (if you’re an S-Corp) or roughly 20% of your net self-employment income (if you’re a sole proprietor), up to $69,000 in 2025. No employee deferral, no separate employer contribution — just one calculation. The simplicity is genuinely appealing, with no annual filing requirement and easy setup at most major brokerages.

How a Solo 401(k) works

A Solo 401(k) has two contribution components: an employee deferral and an employer contribution. As the employee, you can defer up to $23,500 in 2025 (plus $7,500 catch-up if you’re 50 or older). As the employer, you contribute an additional 25% of W-2 salary or 20% of net SE income. Combined limit: $70,000 ($77,500 with catch-up).

The critical advantage: the employee deferral applies regardless of income level. A sole proprietor with $60,000 in net profit can still defer the full $23,500 as the employee — something a SEP-IRA can’t match at that income.

Where the SEP-IRA catches up

At higher income levels — typically above $200,000 in net profit — the gap narrows. At $400,000, both plans approach their annual limits. At that point, the SEP-IRA’s simplicity becomes more attractive for essentially the same result.

The catch-up and Roth advantages

If you’re 50 or older, the Solo 401(k) offers an additional $7,500 catch-up that the SEP-IRA doesn’t. Many Solo 401(k) providers also offer a Roth option for the employee deferral — allowing after-tax contributions that grow and distribute tax-free. The SEP-IRA has no Roth option.

Which one should you use?

For most self-employed business owners with income below $200,000, the Solo 401(k) wins — often by a large margin. At higher income levels the gap closes and the SEP-IRA’s simplicity becomes more competitive. Run your specific numbers with our Solo 401(k) vs. SEP-IRA calculator.