Solo 401(k) vs SEP IRA: which retirement account is better for self-employed in 2025?
Both accounts let self-employed individuals shelter significant income from taxes, but the Solo 401(k) wins for most people who have no employees. Here is how they compare for 2025.
Contribution Limits (2025)
| Account | Limit | Notes |
|---|---|---|
| Solo 401(k) | $70,000 (or $77,500 if 50+) | Employee deferral ($23,500) + employer profit-sharing (up to 25% of net self-employment income) |
| SEP IRA | $70,000 | Up to 25% of net self-employment income (effectively ~20% of Schedule C net profit) |
The Solo 401(k) advantage at lower income levels:
A SEP IRA only allows contributions equal to 25% of compensation (or ~20% of net self-employment income after the SE tax deduction). If you earn $60,000 net from self-employment, your SEP IRA max is roughly $11,089.
With a Solo 401(k), you can contribute up to $23,500 as the employee plus a profit-sharing contribution as the employer — potentially $34,589 at $60,000 of net income. At lower incomes, the Solo 401(k) shelters dramatically more.
When the SEP IRA wins:
- You want the simplest possible setup (no annual filing with IRS until assets exceed $250,000)
- You already missed the December 31 deadline to establish a new Solo 401(k) for the prior year (SEP IRAs can be opened as late as your tax deadline including extensions)
- You have employees (Solo 401(k) is for owner-only businesses; a SEP IRA must cover eligible employees)
Deadlines to remember:
- Solo 401(k): Must be established by December 31 of the tax year to make employee deferrals for that year. The contribution itself can be made up to your tax deadline (April 15 or October 15 with extension)
- SEP IRA: Can be opened AND funded up to your tax deadline including extensions
Roth option:
Many Solo 401(k) plans allow Roth contributions (after-tax, grows tax-free). SEP IRAs are pre-tax only, though you can convert them to a Roth IRA.
Catch-up contributions (age 50+):
- Solo 401(k): An extra $7,500 employee deferral ($31,000 total employee portion)
- SEP IRA: No catch-up contributions allowed
Bottom line: If you are self-employed with no employees and want to maximize retirement savings, the Solo 401(k) is almost always the better choice — especially if your net income is under $200,000. Set it up before December 31 each year.
Sources
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