Solo 401k Vs SEP IRA: Which One Makes More Sense for 2025?

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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.

📝 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:

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):

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:

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.

📌 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:

Feature	SEP IRA	Solo 401k
Eligibility	Any business owner or self-employed individual, with or without employees	Only for business owners or self-employed individuals with no employees (except a spouse)
Contribution Limit (2025)	Up to 25% of compensation, capped at $70,000	Combined employee + employer contributions up to $70,000
Employer Contributions	Up 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 Contributions	Not allowed	Yes—up to 100% of compensation, capped at $23,500
Catch-up Contributions (Age 50+)	Not available	Yes—additional $7,500, for a total of $31,000 in employee contributions
Investment Options	Traditional assets (mutual funds, stocks, ETFs); alternative assets only through a self-directed SEP	Traditional and alternative assets, including real estate and private funds
Roth Option	No	Yes—on the employee side, if supported by the plan provider
Loan Option	No	Yes—up to 50% of the plan value, max $50,000
Withdrawal Age	59½ (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:

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:

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