Being self-employed comes with a lot of freedom—but also the responsibility of building your own retirement plan. While there are many different types of retirement plans for business owners to choose from, only a few are well-suited specifically for those who are self-employed.
When looking for the best retirement plan for self-employed business owners, the two most popular options to consider are the SEP IRA and the Solo 401k. Selecting the one that’s right for you depends on your income level, whether you have employees, and how much flexibility you want in terms of contributions.
In this article, we’ll break down both the SEP IRA and the Solo 401k side by side—covering how each plan works, their pros and cons, how to set them up, and even how they work with other retirement accounts to help you select the best plan for you.
Let’s start by taking a look at the SEP IRA.
What is a SEP IRA? And How Does it Work?
A Simplified Employee Pension IRA (SEP IRA) is exactly what it sounds like—a straightforward retirement plan that’s easy to set up and maintain. Think of it as a turbocharged traditional IRA with much higher contribution limits and without the administrative complexity or reporting requirements of traditional employer plans.
Let’s say you’re a freelance graphic designer or a consultant who’s just getting started. You want to save for retirement but don’t have predictable income yet. A SEP IRA lets you contribute when your business is profitable and skip contributions when cash flow is tight.
SEP IRAs work on a profit-sharing model, meaning only employers (including self-employed individuals) can make contributions. If you have employees, you must contribute the same percentage of compensation for each eligible worker that you contribute for yourself. This rule is important to keep in mind, because while it’s meant to keep things fair, it can also mean that maintaining a SEP IRA for your company can increase your costs if you have a growing team.
So how much can you actually contribute to a SEP IRA?
SEP IRA Contribution Limits 2025
If you decide to open a SEP IRA in 2025, and you pay yourself as an employee, you can contribute up to 25% of your compensation or $70,000, whichever is less. If you’re self-employed (sole proprietor or single-member LLC), the calculation is slightly different – you can contribute up to 20% of your net self-employment income due to how self-employment taxes are calculated.
You can wait until your tax filing deadline (plus extensions) to decide how much to contribute. For example, if you have a strong fourth quarter in 2025 and want to reduce your taxable income for 2025, you can wait until April 15, 2026 (or even October if you file an extension) to make that contribution.
However, unlike traditional IRA or 401k accounts, SEP IRAs do have a few limitations. You can’t make catch-up contributions after age 50, and you don’t have a Roth option—all contributions are pre-tax.
Pros and Cons of a SEP IRA
A SEP IRA’s biggest strength is its simplicity. There’s no annual IRS filing, no complex paperwork, and you don’t have to contribute every year. This is one of the main reasons why many new business owners who aren’t sure where to begin with their retirement planning start with a SEP IRA.
Another pro of a SEP IRA is its flexibility. If your business has a slow year, for example, you can skip contributions without penalty. It’s also ideal for a small business with employees because you can set one up for everyone with minimal administrative work.
On the downside, contributions are entirely employer-funded, which means you (or your employees) can’t make elective deferrals like with a 401k. And if you have employees, you must contribute the same percentage of compensation for them as you do for yourself. For instance, if you decide to contribute 10% of your salary to your SEP IRA, you must also contribute 10% for each eligible employee, so you need to factor this into your business budget.
How to Set Up a SEP IRA
Most financial advisors and online brokerage firms will allow you to open a SEP IRAs with zero or minimal setup fees. You simply need to complete a short IRS form (Form 5305-SEP), open the account, and transfer contributions directly from your business account. Since there are no annual reporting requirements, ongoing maintenance is almost nonexistent.
What is a Solo 401k? And How Does It Work?
A solo 401k is a type of 401k plan that is designed specifically for business owners with no employees (except potentially a spouse). One of its greatest perks is that it allows you to contribute both as the employee and the employer, meaning you can often save a lot more money than with a traditional IRA or a SEP IRA.
The Solo 401k also gives you the ability to take advantage of the Roth option so you can make after-tax contributions or to potentially even take a loan from your account if needed.
Contribution Limits for 2025
In 2025, Solo 401k plans let you contribute up to $23,500 as an employee, plus up to 25% of compensation as the employer, with a combined cap of $70,000. If you’re 50 or older, you can add an extra $7,500 in catch-up contributions, or even $11,250 if you’re between 60–63. That means you could save over $80,000 in a single year.
Let’s say you’re a freelance web developer making $50,000 a year, operating as a sole proprietor. With a SEP IRA, you could contribute roughly $10,000 (20% of net income). But with a Solo 401k, you could put in $23,500 as an employee deferral plus 25% of your net earnings as the employer.
If you find yourself with surplus cash or need to catch up on your retirement savings in your later years, this could make a huge difference in helping you achieve your retirement goals.
What About Your Spouse?
If your spouse works in the business, they can also contribute to the Solo 401k, effectively doubling your household contribution limits. But there’s a key rule: the spouse has to be an actual employee of the business and earn income for the contributions to count.
Pros and Cons of a Solo 401k
The larger contribution limits are the primary advantage of a Solo 401k for self-employed business owners. In addition, the Roth and loan features give you more flexibility when it comes to cash flow and tax planning.
The downsides of choosing the Solo 401k route? Compared to a SEP IRA, there is more paperwork in terms of the setup and plan maintenance. Once your account balance hits $250,000, you’ll need to file an annual Form 5500-EZ with the IRS.
Also, you can’t use this plan if you hire non-spouse full-time employees. If that happens, you’ll have to switch to a traditional 401k or another plan that includes them.
How to Set Up a Solo 401k
To set up a solo 401k, you’ll need to complete a plan adoption agreement plus basic plan documents with a plan provider (your financial advisor or online brokerage firm). Once your plan is established, you’ll open a trust account for the 401k, keep records of both employee and employer contributions, and file Form 5500-EZ when required.
How Should You Choose Between the SEP IRA and the Solo 401k?
If you’re looking for simplicity and flexibility, a SEP IRA is often the better starting point—especially if you have (or plan to have) employees. It’s easy to manage and lets you adjust contributions based on your business’s performance.
If you don’t plan to have any employees (other than a spouse) and your goal is to maximize contributions, a Solo 401k usually wins. It offers Roth contributions, higher limits, and the ability to take a loan if necessary.
Remember, your choice isn’t locked in forever. Many business owners start with a SEP IRA, then switch to a Solo 401k as their income grows—or vice versa.
Want some guidance in selecting the best retirement plan for your business? Schedule a complimentary call with one of our financial planners in Tampa today.
FAQs about SEP IRAs and Solo 401ks
Can I convert my SEP IRA or Solo 401k to a Roth account later?
Yes, you can roll funds from either plan into a Roth IRA, but you’ll owe income taxes on the amount you convert. This strategy can make sense if you expect higher taxes in retirement. Click here to learn more about Roth IRA conversions and whether you should do one.
Which business structures are eligible for these plans?
Both plans are available to sole proprietors, partnerships, single-member LLCs, and S corporations. The main difference is that Solo 401ks are strictly for businesses with no employees other than a spouse.
Can I still contribute to a traditional or Roth IRA?
Yes. Having a SEP or Solo 401k doesn’t stop you from contributing to a traditional or Roth IRA, as long as you meet the standard income and contribution limits.
Disclosure: Jaffe Tilchin Investment Partners is a Registered Investment Advisor. Certain representatives of Jaffe Tilchin Investment Partners are also Registered Representatives offering securities through APW Capital, Inc., Member FINRA/SIPC. 100 Enterprise Drive, Suite 504, Rockaway, NJ 07866 (800)637-3211 Check the background of this firm on FINRA’s BrokerCheck
