OVERVIEW

  • SEP IRAs are available to businesses of any size, including those with employees.
  • Solo 401ks are limited to self-employed individuals or business owners with no common-law employees, except for a spouse.
  • For 2025, the total contribution limit is $70,000 for both SEP IRA and Solo 401k plans.
  • Only Solo 401ks allow catch-up contributions—up to an additional $7,500 if you are age 50 or older by December 31, 2025.
  • SEP IRAs are funded solely by employer contributions, up to 25 percent of compensation (typically around 20 percent for sole proprietors or single-member LLCs).
  • Solo 401ks allow both employee and employer contributions, making it easier to reach the full limit with less income.
  • The Solo 401k employee contribution limit is $23,500 for 2025, or $31,000 if you are age 50 or older.
  • SEP IRAs have no catch-up provision.
  • SEP IRAs require equal percentage contributions for all eligible employees if you make a contribution for yourself.
  • Solo 401ks cover only you (and your spouse), with no employee matching requirement.
  • Solo 401ks offer a Roth option for employee contributions. SEP IRAs do not support Roth contributions.
  • Solo 401ks may allow you to borrow from the plan — up to 50 percent of the account value or $50,000, whichever is less. SEP IRAs do not allow participant loans.
  • Investment options in a Solo 401k can include almost any asset type, while SEP IRAs typically focus on traditional investments like stocks, bonds, and mutual funds.

Looking to open a Solo 401k plan? Get started today! – The Carry Solo 401k Plan is a featured-packed self-directed account that lets you invest in both traditional and alternative assets, take out a loan, or do a Mega Backdoor Roth conversion.

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Maximize Your Retirement Savings With a Solo 401k

Maximize Your Retirement Savings With a Solo 401k

As a business of one, you can contribute more and potentially save more on taxes.* Carry’s Solo 401k is built for entrepreneurs, freelancers, and high earners who want flexible investing and bigger retirement contributions, all in one streamlined plan.

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*Solo 401(k) eligibility and contribution limits depend on IRS rules. Carry does not provide tax advice, consult a tax advisor. Carry Advisors LLC, an SEC-registered investment adviser, provides investment advisory services for discretionary and non-discretionary accounts (e.g., Solo 401(k), IRA, taxable brokerage accounts). Bank and trust accounts are not advised by Carry Advisors. Brokerage accounts are introduced by Global Carry LLC and carried by DriveWealth LLC, both members FINRA/SIPC. Advisory fees may apply and additional disclosures are described in our Form ADV and CRS.

Choosing a retirement plan when you’re self-employed isn’t always straightforward. Both the Solo 401k and SEP IRA can help you lower taxes and save for the future. But the rules, flexibility, and advantages vary more than you might expect.

If you’re unsure which one fits your situation better, it often comes down to your income, business structure, and whether you have employees. Before picking a plan, it helps to understand how each account works and where the differences start to matter.

📌 Also Read: Can I Contribute to a SEP IRA and Solo 401k at the Same Time?

Eligibility Rules

To open either a SEP IRA or a Solo 401k, you must be self-employed or own a business. But the key difference lies in how each plan treats employees.

  • A SEP IRA can be used by any business, regardless of size. That means you’re allowed to have employees—and still make contributions to your own account—as long as you follow the plan’s rules for employee eligibility and equal contributions.
  • A Solo 401k is only available if you have no common-law employees, aside from a spouse. This rule applies regardless of whether those employees are full-time or part-time. If you plan to hire staff beyond your spouse, or if your workers meet long-term part-time thresholds under SECURE 2.0, a Solo 401k may no longer be an option.

📝 Keep in mind: Once an employee becomes eligible under 401k participation rules, your plan is no longer considered a one-participant (Solo) plan — and you may need to transition to a standard 401k.

Contribution Limits

For 2025, both the SEP IRA and the Solo 401k have a maximum combined contribution limit of $70,000. But only the Solo 401k offers catch-up contributions. If you’ll be age 50 or older by December 31, 2025, you can contribute an additional $7,500, for a total of $77,500.

The bigger difference, however, isn’t just in the dollar cap. It’s how you reach it.

The SEP IRA allows contributions only from the employer side, based on a percentage of your compensation. The Solo 401k, by contrast, uses a dual contribution structure—you can contribute as both an employee and an employer, which makes it easier to max out the limit with lower income.

How You Can Contribute

While both plans share the same overall contribution cap, the way you contribute is very different. That difference can impact how much income you need to fully fund your account.

A Solo 401k lets you contribute in two ways:

✅ As an employee, you can make elective deferrals up to $23,500 in 2025, or $31,000 if you’re age 50 or older.

✅ As an employer, you can also contribute up to 25 percent of your compensation (typically around 20 percent for sole proprietors).

A SEP IRA, on the other hand, is funded only with employer contributions—up to 25 percent of your compensation (20 percent for sole proprietors). Employees cannot contribute directly to their own SEP IRA accounts.

Because of this structure, you generally need more income to reach the full contribution limit with a SEP IRA compared to a Solo 401k.

Maximizing Contributions

Because the Solo 401k allows both employee and employer contributions, you typically need less income to reach the full limit compared to a SEP IRA.

As a reminder, the combined contribution cap for 2025 is $70,000, or $77,500 if you’re age 50 or older and eligible for catch-up contributions under a Solo 401k.

Employer contribution rules are the same for both plans:

  • Up to 25 percent of compensation if your business is incorporated
  • Around 20 percent if your business is not incorporated (such as a sole proprietorship or single-member LLC)

But only the Solo 401k allows you to contribute up to 100 percent of your earned income on the employee side, up to $23,500 in 2025, or $31,000 if you’re age 50 or older.

✏️ Hypothetical Example (2025 limits):

  • SEP IRA: To contribute the full $70,000, you would need $280,000 in compensation.
    (25% × $280,000 = $70,000)
  • Solo 401k: With the full $23,500 employee deferral, you’d need just $186,000 in income to reach the remaining $46,500 through employer contributions.
    (25% × $186,000 = $46,500)

Difference: That’s $94,000 less income required to max out a Solo 401k

📝 Note: These numbers are simplified for illustration and don’t account for self-employment tax deductions or other adjustments that may apply based on your business structure.

And if you have employees, the cost of maximizing a SEP IRA can increase even more, since you’d need to make equal contributions for each eligible worker.

Also read: Solo 401k Contribution Types

Matching Employee Contributions Rule for SEP IRAs

A SEP IRA is funded entirely by the employer. Employees cannot contribute directly to their own SEP IRA accounts.

If you have eligible employees and choose to contribute to your own SEP IRA, you’re required to contribute the same percentage of compensation to each employee’s SEP IRA as well. This rule applies equally—regardless of how many employees you have.

✏️ Hypothetical Example:
If you contribute 25 percent of your own compensation into your SEP IRA, you must also contribute 25 percent of each eligible employee’s compensation into their SEP IRAs.

This requirement can become costly for businesses with multiple employees, especially if your workforce is growing or includes higher earners.

📝 Note: To be considered eligible for SEP IRA contributions in 2025, employees must:

  • Be at least 21 years old
  • Have worked for you in at least three of the last five years
  • Have earned at least $750 in 2025 (up from $650 in 2021–2022 and $750 in 2023–2024)

Because of these rules, a SEP IRA may be more practical for solo business owners or those with very few employees.

Roth Option

One of the biggest differences between a SEP IRA and a Solo 401k is the option to make Roth contributions. A Solo 401k may offer a Roth account, while a SEP IRA is limited to pre-tax contributions only.

With a SEP IRA, all contributions are made with pre-tax income. You may receive a deduction in the year of the contribution, but withdrawals in retirement are treated as ordinary income and taxed accordingly. There is no Roth version of a SEP IRA.

A Solo 401k, on the other hand, includes a Roth option on the employee side—if your plan provider supports it. This means you can choose to contribute your employee elective deferrals using after-tax dollars, and in retirement, qualified withdrawals are tax-free. Employer contributions, however, must still be made pre-tax.

The Roth Solo 401k limit for 2025 is $23,500, or $31,000 if you’re age 50 or older. That’s significantly higher than a Roth IRA, which has a $7,000 limit (or $8,000 with catch-up).

📝 Note: Not all Solo 401k providers include Roth functionality. If this feature matters to you, it’s worth reviewing plan details before opening an account.

Investment Options

Both SEP IRAs and Solo 401ks can be used to invest in traditional assets like stocks, bonds, mutual funds, and ETFs. But when it comes to alternative investments, the options vary.

A Solo 401k generally offers broader flexibility, allowing you to invest in almost any asset type, including real estate, private funds, startups, and other non-public assets. This makes it a potentially attractive choice for investors who want to diversify beyond the stock market.

A standard SEP IRA is more limited. It typically restricts you to publicly traded assets unless you open a self-directed SEP IRA, which can allow access to alternative investments—though with more complexity and oversight required.

📝 Note: Not all custodians support alternative assets, and investing in them involves additional risks and responsibilities. Make sure to evaluate provider terms carefully.

Withdrawal Rules

Withdrawal rules for SEP IRAs and Solo 401ks are largely similar when it comes to timing and penalties.

In most cases, you must wait until age 59½ to begin taking withdrawals. If you withdraw earlier, the amount is generally subject to ordinary income tax plus a 10 percent early withdrawal penalty.

Both plans are also subject to required minimum distributions (RMDs) once you reach age 73, as outlined by SECURE 2.0.

The difference comes in how withdrawals are taxed, especially if your Solo 401k includes a Roth component.

  • SEP IRA and traditional Solo 401k contributions are made with pre-tax dollars, so withdrawals in retirement are taxed as ordinary income.
  • Roth Solo 401k withdrawals, by contrast, are generally tax-free, as long as the account has been open for at least five years and you’re at least age 59 ½. That’s because Roth contributions are made with after-tax dollars.

📌 Also Read: IRA And 401k RMD Table For 2024 & 2025

Loans

One unique feature of the Solo 401k is the option to borrow from your account. This feature is not available with a SEP IRA.

With a Solo 401k loan, you may borrow up to 50 percent of your account balance, capped at $50,000. The interest rate is typically based on the current prime rate, plus 1 or 2 percent, depending on your plan provider.

While the process is generally straightforward and doesn’t impact your credit score, taking a loan from your Solo 401k comes with trade-offs.

The money you borrow stops growing tax-deferred inside your plan, which could reduce your long-term savings potential. And although you’re repaying yourself with interest, the interest is paid with after-tax dollars, which may have additional tax implications later.

Still, for those who need access to short-term liquidity, it’s a feature that may provide added flexibility, as long as it’s used carefully and repaid on time.

Which Plan Fits Better for You?

If you’re eligible for both plans, here’s a quick side-by-side summary to help clarify the key differences:

FeatureSEP IRASolo 401k
EligibilityAny business owner or self-employed individual, with or without employeesOnly for business owners or self-employed individuals with no employees (except a spouse)
Contribution Limit (2025)Up to 25% of compensation, capped at $70,000Combined employee + employer contributions up to $70,000
Employer ContributionsUp to 25% of compensation (≈ 20% for sole proprietors and single-member LLCs)Same—up to 25% of compensation (≈ 20% for sole proprietors and single-member LLCs)
Employee ContributionsNot allowedYes—up to 100% of compensation, capped at $23,500
Catch-up Contributions (Age 50+)Not availableYes—additional $7,500, for a total of $31,000 in employee contributions
Investment OptionsTraditional assets (mutual funds, stocks, ETFs); alternative assets only through a self-directed SEPTraditional and alternative assets, including real estate and private funds
Roth OptionNoYes—on the employee side, if supported by the plan provider
Loan OptionNoYes—up to 50% of the plan value, max $50,000
Withdrawal Age59½ (10% penalty if withdrawn earlier)59½ (10% penalty if withdrawn earlier)

In most cases, if you don’t have employees and qualify for both plans, the Solo 401k may offer more advantages:

✅ It includes employee contributions, allowing you to hit the annual limit with less income than a SEP IRA requires.

✅ It has a Roth option for after-tax savings.

✅ It offers broader investment flexibility, including access to alternative assets.

✅ It also gives you the option to borrow from your account if needed.

However, SEP IRAs have their strengths too. They’re typically faster to set up, widely available through most brokers, and easier to manage if you don’t need features like Roth or loans. For businesses with employees, they also provide a way to fund employee retirement without requiring complex plan administration.

📝 One important consideration with SEP IRAs: if you contribute to your own account, you must contribute the same percentage to all eligible employees. This could lead to significant costs if your team grows.

Can You Use Both?

Yes. In specific situations, you may be able to contribute to both a SEP IRA and a Solo 401k. For example, if you operate two businesses, and only one has employees, you could set up:

  • A SEP IRA for the business with employees
  • A Solo 401k for the business without employees

This depends on how the plans are structured and whether the businesses are treated as a single controlled group. You’ll want to confirm with a qualified tax or retirement professional before combining strategies.

Final Thoughts

Choosing between a SEP IRA and a Solo 401k ultimately depends on your business structure, income level, and whether you have employees. Both plans offer meaningful tax advantages and high contribution potential, but the right fit varies case by case. Be sure to review your eligibility, consider your investment goals, and consult a qualified professional before deciding.

📌 To explore more retirement strategies and account comparisons, check out our other articles in the Carry Learning Center:


Disclaimer:

The Carry Learning Center is operated by The Vibes Company Inc. (“Vibes”) and contains generalized educational content about personal finance topics. While Vibes provides educational content and technology services, all investment advisory services discussed on this website are provided exclusively through its wholly-owned subsidiary, Carry Advisors LLC (“Carry Advisors”), an SEC registered investment adviser. The information contained on the Carry Learning Center should not be construed as personalized investment advice and should not be considered as a solicitation to buy or sell any security or engage in a particular investment, accounting, tax or legal strategy. Vibes is not providing tax, legal, accounting, or investment advice. You should consult with qualified tax, legal, accounting, and investment professionals regarding your specific situation.

The accounts, strategies and/or investments discussed in this material may not be suitable for all investors. All investments involve the risk of loss, and past performance does not guarantee future results. Investment growth or profit is never a guarantee. All statements and opinions included on the Carry Learning Center are intended to be current as of the date of publication but are subject to change without notice.

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