Self-Employed Retirement Plans: How to Pick Between Solo 401(k) and SEP IRA
Over the last decade, there's been a growing number of people striking out on their own to become self-employed, whether it's their full-time job or a side hustle. According to the Pew Research Center’s latest data, there are about 15 million such workers in the United States — or 10% of the US workforce.
But while many self-employed people have their sights set on business now, that laser focus can be at the expense of their future savings. A recent Guideline survey found that 70% of solopreneurs focus on building their business over saving for retirement.1
While alarming, this stat isn't all that different from a concerning national trend: One in five Americans over 50 years old have no retirement savings.
Yes, there’s a ton to juggle as a freelancer, solopreneur, or small business owner. But 81% of self-employed people wish they had learned about saving for retirement earlier — showing that if they had the resources to do so, they probably would be saving at higher rates.1
If you’re a solo entrepreneur and this resonates with you, read on. Figuring out how to save for retirement can be confusing, but among the many powerful retirement options you have, there are two that may rise to the top: the solo 401(k) and the SEP IRA.
While both are great options, the solo 401(k) has been gaining popularity due to additional benefits like the mega backdoor Roth and the ability to maximize contributions more easily. In fact, more professionals who work with solo entrepreneurs recommend a solo 401(k) over a SEP IRA (45%).2
However, both have their pros and cons depending on your unique situation. In this article we’ll dive into how each one works, their unique tax benefits, and how you can use them to maximize your retirement savings.
Client of Guideline. Views may not be representative of other clients."My Solo 401(k) and the power of compound interest are helping me fund my future."Joshua BerkOwner, Berk Labs
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With Guideline, you’ll get an impactful solo 401(k) while minimizing paperwork and fees.
Understanding the basics of solo 401(k) and SEP IRA plans
There’s an age-old debate about which type of plan — solo 401(k) or a SEP IRA — is better for self-employed people. Although both plans have a maximum contribution limit of $70,000, getting to that limit looks very different for each one.
Here’s a quick breakdown of their differences and similarities:
Solo 401(k)s: Contribution limits and benefits
A solo 401(k), also known as an individual 401(k), is a retirement plan where only owners or partners and their spouses are eligible to participate.
How contributions to a solo 401(k) work:
One of the big advantages of a solo 401(k) is that you can contribute up to $70,000 for 2025 by saving as both the employer and the employee:3
- Employee deferrals: up to $23,500 in 2025,
- plus $7,500 if 50-59, or 64+
- plus $11,250 if 60-63
- Employer profit-sharing contributions: up to 25% of compensation or $70,000, whichever is less
| Role | Solo 401(k) Contribution Limit |
|---|---|
| Employee deferral | $23,500 (plus $7,500 if age 50-59 or 64+; plus $11,250 if age 60-63) |
| Employer portion | Up to 25% of compensation |
| Total limit | $70,000 ($77,500 or $81,250 with catch-up, depending on age) |
Because of this contribution set up, people with a solo 401(k) — and especially high earners — can have an easier path to maxing out their plan every year.
However, solo 401(k)s also have compliance requirements that have made them less attractive in the past. For example, if you have more than $250,000 in assets you have to file a Form 5500 every year.
Luckily, things have gotten easier. Modern 401(k) providers like Guideline handle IRS Form 5500 prep and automate plan compliance and administration, making a solo 401(k) much more accessible than it used to be.
A solo 401(k) can be best suited for:
- Sole proprietors, freelancers, consultants
- Small business owners without W-2 employees working more than 500 hours in a year
- People who want the ability to take out loans if they need to
- High earners wanting to maximize tax deductions
Get your roadmap to retirement
With Guideline, you’ll get an impactful solo 401(k) while minimizing paperwork and fees.
SEP IRAs: Contribution limits and benefits
A SEP IRA (Simplified Employee Pension) is a plan where contributions are made to an IRA. It allows employers or self-employed people to make tax-deductible contributions towards retirement, reducing tax liability for the contribution year.
How contributions to a SEP IRA work:
- Only employers can contribute
- Contributions are capped at 25% of compensation, up to a maximum of $70,000 in 20253
- No employee deferrals
While a SEP IRA is simple and low maintenance, it can be more difficult to max out your contribution limit since it is dependent on your compensation. In 2025, you’d have to make $280,000 in order to hit the $70,000 maximum contribution limit. This can be a significant drawback compared to other retirement plans that allow for higher contributions regardless of income, or that offer both employee and employer contributions.
| SEP IRA Contribution Type | Limit |
|---|---|
| Employer only | Up to 25% of compensation |
| Max contribution | $70,000 in 2025 |
A SEP IRA may be best suited for:
- Solopreneurs who want a simple, low-maintenance retirement option
- Businesses with variable income or seasonal work
- Family owned businesses that want to share profits equally
- Workers with fluctuating income who want flexible contribution rules
- People under 50, since it doesn’t offer a catch-up
- People who are unlikely to need access to loans
Key deadlines for setting up a SEP IRA or a solo 401(k)
While there are pros and cons to each plan, understanding deadlines is another crucial component when it comes to making your decision.
| Action | Solo 401(k) | SEP IRA |
|---|---|---|
| Establish plan | If you report income on a W2 and want to include: -Both employee and employer contributions, the plan must be established by December 31 of that year. -Only employer contributions, the plan must be established by the tax filing due date (plus extensions) for your business. If you determine income through a K1 or Schedule C, in order to include both employee and employer contributions the plan must be established by the tax filing due date (plus extensions) for your business. | Must be established by your business's tax filing deadline, including extensions, for the year you want to make contributions. |
| Make employee contributions | Generally by December 31st of the tax year. If you’re a sole proprietor or a single-member LLC, contributions can typically be made until your tax filing deadline (including extensions) for the year. | Not applicable. SEP IRAs are employer-funded plans only; they do not allow for employee (salary deferral) contributions. |
| Make employer contributions | Can typically be made until the business tax filing deadline, including extensions. | Must be made by your business's tax filing deadline, including extensions, for the year the contributions apply. |
Tax benefits and implications
While the solo 401(k) and the SEP IRA are structured differently regarding contributions, when it comes to tax benefits and implications, they’re actually pretty similar.
Solo 401(k) and SEP IRA tax implications:
- Up front tax deduction: Contributions to both a Solo 401(k) and a SEP IRA are typically tax-deductible. This can lower your taxable income in the year you contribute, giving you immediate tax savings.
- Penalty for early withdrawal: Taking money out of either plan before age 59 1/2 usually means facing a 10% extra tax penalty along with regular income tax. There are some exceptions for specific situations.
- Required withdrawals later: Once you reach a certain age (currently 73), both plans have required minimum distributions — i.e. withdrawals — each year. This ensures the money is eventually taxed.
- Easy rollovers: You can move money from either a solo 401(k) or a SEP IRA to other retirement accounts without paying taxes at that time. This gives you flexibility in managing your retirement savings.
Pro tip: Guideline’s survey found that 40% of professionals who serve self employed people (like accountants) say that a solo 401(k) provides better opportunities for tax credits and incentives.
Pros and cons of solo 401(k)s and SEP IRAs
Here’s a visual overview of how a solo 401(k) and a SEP IRA differ.
| Feature | Solo 401(k) | SEP IRA |
|---|---|---|
| Contribution Limit | Up to $70,000 ($77,500 age 50+) | Up to $70,000 |
| Employee Contributions | ✅ Yes | ❌ No |
| Catch-Up Contributions | ✅ Yes (if 50+) | ❌ No |
| Loan Option | ✅ Yes (up to $50,000) | ❌ No |
| Ideal For | High earners, planners, tax optimizers | Inconsistent income, minimal admin needs |
| Annual IRS Filing (Form 5500) | ✅ Yes (if >$250K) | ❌ No |
| Hardship withdrawals | ✅ Yes | ❌ No |
Conclusion: Making the right choice for your retirement
So, how do you know which one to sign up for? Choosing between a solo 401(k) and a SEP IRA can depend on your income, goals, and how much flexibility you want in your retirement planning.
A solo 401(k) may be a good choice if you:
- Want to maximize contributions
- Value Roth contributions and loan features
- Want full control over investment strategy
- Are 50 or older and want catch-up options
A SEP IRA may be a good choice if you:
- Have fluctuating income
- Want the simplest setup
- Don’t plan to make employee contributions
Build your business — while also saving for the future
For many solopreneurs in 2025, a Solo 401(k) can be a great choice — especially because it comes with tools that help simplify plan management and compliance. Between the contribution limit structure and the ability to decide between Roth vs. traditional 401(k), solo 401(k)s can give solopreneurs more flexibility as their businesses grow and change.
If you’re ready to get started saving for retirement, click here to talk with a specialist.
Get your roadmap to retirement
With Guideline, you’ll get an impactful solo 401(k) while minimizing paperwork and fees.
For informational purposes only. This should not be considered financial, tax, or legal advice. Contact a financial professional to evaluate what retirement plan is best suited for your situation.