Solo 401(k) vs SEP IRA
Should a self-employed person use a Solo 401(k) or a SEP IRA?
Solo 401(k) usually lets you put away more on the same income, and supports Roth and loans. SEP is simpler to open and run.
Key takeaways
- Solo 401(k) often allows higher contributions at the same income
- SEP is simpler — no annual filing until assets are large
- Solo 401(k) supports Roth contributions
- Only the Solo 401(k) supports loans
When to choose Solo 401(k)
You want the highest possible contribution and Roth flexibility.
When to choose SEP IRA
You want the simplest plan you can set up in an afternoon.
TL;DR
If you're a one-person business with no employees, a Solo 401(k) is usually the better tool. A SEP wins on pure simplicity.
Key differences
- Solo 401(k): employee + employer contributions, Roth option, loans permitted, more paperwork once assets are large.
- SEP IRA: employer-only contributions as a percent of net self-employment income, no Roth option, simplest setup.
When each wins
- Solo 401(k) wins when you want to max contributions, want Roth, or might want a loan.
- SEP wins when you want the simplest possible plan and don't need Roth.
Watch-outs
Adding an employee changes both plans dramatically — re-evaluate before hiring.
Related
A 401(k) is set up through your employer with much higher limits. An IRA is opened on your own with more investment choices.
Roth uses after-tax money and grows tax-free. Traditional may give you a tax break today but you pay tax on withdrawals.
Wealthypedia is educational. This isn't financial, tax, legal, or investment advice. Last reviewed —.