Whether you run a small business, freelance, or work in the gig economy, retirement planning is another item on an already packed to-do list. The good news is that you have accessible options to reach your goals. Specifically, SEP IRAs and Solo 401(k)s are explicitly built for the self-employed.

Each plan offers powerful tax advantages and high contribution limits, but they differ in flexibility, administrative requirements, and eligibility. In this guide, we’ll break down the pros and cons of SEP IRAs and Solo 401(k)s and help you determine which fits your situation best.

What Is a SEP IRA?

A Simplified Employee Pension (SEP) IRA is a retirement plan designed for self-employed individuals and small business owners. It’s easy to set up and manage, with flexible annual contributions and minimal paperwork.

SEP IRA Benefits

SEP IRAs offer several advantages that make them a smart choice for self-employed individuals and small business owners. Here are some key benefits to consider:

• SEP IRAs are simple to set up and maintain. They are easy to establish and manage through most financial institutions. Unlike traditional 401(k) plans, they require minimal paperwork and do not require employers to file an annual return.
• Tailored for self-employed individuals and small business owners. SEP IRAs are specifically designed to meet the needs of sole proprietors, freelancers, gig workers, and small businesses. They offer an accessible retirement savings option for those who don’t have access to an employer-sponsored plan.
• High contribution limits. Contributions are currently capped at $70,000,  which is significantly more than the contribution limits for Traditional or Roth IRAs, which cap out at $7,000 ($8,000 if age 50 or older).
• Tax-deductible contributions. Contributions made to an SEP IRA are generally tax-deductible, reducing your taxable income. If you’re self-employed, you can deduct the lesser of your actual contributions or 25% of your net earnings, helping you save on taxes while saving for retirement.

SEP IRA Eligibility

To be eligible for an SEP IRA, you must be an “employer,” which includes sole proprietors, LLCs, S Corps, or C Corps, as well as self-employed workers, such as independent contractors and gig workers.

SEP IRA Contribution Limits

In 2025, you can contribute up to the lesser of 25% of your compensation or $70,000. Unlike standard IRAs, there are no catch-up contributions.

Remember that contribution limits can and often do change year to year. Always check with the latest IRS guidelines to determine your annual contribution limit.

What Is a Solo 401(k)?

As the name suggests, a Solo 401(k) is structured similarly to a standard 401(k) available through many employees, but they are designed for sole proprietors or business owners without employees, except a spouse.

Solo 401(k) Benefits

• Simple to open and maintain. Like SEP IRAs, Solo 401(k)s are easy to administer, especially when compared to standard 401(k)s.
• Dual contributions permitted. Solo 401(k)s allow you to make contributions as both the employer and employee.
• Higher contribution limits. Like SEP IRAs, Solo 401(k)s have higher contribution limits when compared to standard IRAs.
• Allows for catch-up contributions. If you are 50 or older, you can make a catch-up contribution of up to $7,500. If you are 60 to 63, you can make a higher catch-up contribution of $11,250.
• Option to borrow from your account. You can borrow up to $50,000 or 50% of your plan value, whichever is the lesser. This option is not available under any IRA plan, including SEP IRAs.

Solo 401(k) Eligibility

To be eligible for a Solo 401(k), you must be self-employed or a business owner without any employees. Once you hire employees, you will only be eligible for a Solo 401(k) if you have one employee, and it is your spouse.

Solo 401(k) Contribution Limits

You can contribute up to a combined $70,000 (2025) to a Solo 401(k), with the option to contribute an additional $7,500 if you’re 50 or older and $11,250 if you are 60, 61, 62, or 63.

The total contribution limit includes elective deferrals (made as an employee) and non-elective contributions (made as an employer), both of which have their own rules.

• Elective deferrals, or contributions made by the employee, can be made up to 100% of your compensation or earned income, up to the IRS-set annual contribution limit of $23,500 (as of 2025).
• Employer non-elective contributions can be up to 25% of compensation, or if self-employed, the limits are based on the rate table in Publication 560, Retirement Plans for Small Businesses.

Differences Between SEP IRAs and Solo 401(k)s

SEP IRAs and Solo 401(k)s share a lot of similarities, but there are two key differences to keep in mind as you compare your options:

Contribution limits

Both SEP IRAs and Solo 401(k)s allow for up to $70,000 in annual contributions as of 2025, but only the Solo 401(k) allows for an additional $7,500 catch-up contribution if you’re 50 or older or $11,250 for those ages 60 to 63.

A Solo 401(k) also expands contribution opportunities to include contributions made by the employer and the employee. Depending on your income, that may provide an increased savings and tax advantage.

Eligibility

Solo 401(k)s and SEP IRAs cater to business owners, sole proprietors, and the self-employed, but only the SEP IRA allows for business growth in the form of hired staff. You cannot maintain a Solo 401(k) if you plan to hire employees, with the only exception being your spouse.

Examples of When a SEP IRA Is Better than a Solo 401(k)

A SEP IRA is likely the better option if you’re self-employed or are a sole proprietor who anticipates hiring employees, even if it’s only a few. Hiring employees will make you ineligible for a Solo 401(k).

In addition, a SEP IRA is also a better option if you have employees and are looking for a simple path to provide them with a retirement benefit.

Examples of When a Solo 401(k) Is Better than a SEP IRA

If you don’t plan on hiring employees, a Solo 401(k) can provide the potential to save more over the years when compared to a SEP IRA, depending on your income. And, since you can make dual contributions, you may find that a Solo 401(k) provides an enhanced tax deduction benefit.

Another reason a Solo 401(k) may be better is if you prefer to fund your retirement account with after-tax contributions. Solo 401(k)s are available as Roth accounts, but SEP IRAs don’t share that same feature.

Bottomline

SEP IRAs and Solo 401(k)s are both suitable options if you’re a business owner or otherwise self-employed, but which one is right for you will depend on your business and savings goals. Here are a few key things to keep in mind:

• A SEP IRA allows you to maintain your account even if you hire employees, while a Solo 401(k) is only an option if you’re the only employee or if your only other employee is a spouse.
• Both SEP IRAs and Solo 401(k)s have higher contribution limits than standard IRAs. The max contribution for each is $70,000 in 2025, while the max contribution for a standard IRA is $7,000 ($8,000 if you’re over 50).
• Only Solo 401(k)s are available as Roth accounts.  SEP IRAs can only be funded with pre-tax dollars.
• If you’re unsure which option best suits your needs and future goals, speak to a financial expert who can help identify the correct product.

FAQs

Who is eligible for a Solo 401(k)?

Any self-employed individual or business owner with no full-time employees (excluding a spouse) can open a Solo 401(k). If you hire employees (other than your spouse), you may need to convert to a traditional 401(k).

Who can open a SEP IRA?

Any business owner, including sole proprietors, partnerships, and corporations—even those with employees—can establish a SEP IRA. Employers must contribute the same percentage of salary for all eligible employees.

Can I take a loan from either plan?

Solo 401(k)s allow loans up to 50% of your account balance (max $50,000). SEP IRAs do not permit loans.