Saving for retirement can be challenging for small business owners—especially when traditional retirement tools, such as IRAs, don’t allow for meaningful contribution levels. Fortunately, there are two powerful retirement planning options designed specifically for business owners: SEP IRAs and Solo 401(k)s.
Understanding the differences between these plans can help you choose the strategy that best aligns with your business structure, income, and long-term goals.
What Is a SEP IRA?
A SEP IRA (Simplified Employee Pension IRA) is a retirement plan that allows small business owners to make substantial tax-advantaged contributions toward retirement. Contribution limits are significantly higher than those of traditional or Roth IRAs, allowing employers to contribute up to 25% of compensation, capped at $70,000 per year (2025).
Employers also have the ability contribute to their employee’s accounts, up to the lesser of 25% of their compensation or $70,000 in 2025.
One of the primary advantages of a SEP IRA is simplicity. These plans are easy to establish and maintain, with minimal administrative and reporting requirements compared to other qualified retirement plans.
What Is a Solo 401(k)?
A Solo 401(k) is designed for business owners with no employees other than themselves (and possibly a spouse). Like SEP IRAs, Solo 401(k)s allow for much higher contribution limits than traditional retirement accounts and can be an excellent option for high-income solo business owners.
Key features of a Solo 401(k) include:
- Employee contributions of up to $23,500 per year
- Employer contributions of up to 25% of compensation, with total annual contributions capped at $70,000
- Catch-up contributions of $7,500 for individuals age 50 and older
- Additional catch-up contributions of up to $11,250 annually for those ages 60–63
- Roth (after-tax) contribution options
- Loan provisions, allowing participants to borrow from the plan if needed
By combining both employee and employer contributions, a Solo 401(k) provides exceptional flexibility and the potential to accelerate retirement savings. However, these plans come with additional administrative responsibilities, including annual reporting once plan assets exceed certain thresholds.
Which Option Makes Sense for You?
SEP IRAs are often a strong fit for small businesses with multiple employees due to their simplicity and ease of maintenance. The primary limitation is that contributions can only be made by the employer, which may reduce flexibility in certain planning situations.
Solo 401(k)s are typically ideal for owner-only businesses seeking to maximize retirement savings quickly. The ability to make both employee and employer contributions—along with Roth and loan features—makes this a highly versatile option.
There is no one-size-fits-all answer when choosing between a SEP IRA and a Solo 401(k). The right choice depends on your business structure, income level, employee situation, and long-term financial goals.
Working with a financial planner can help you evaluate these factors in the context of your broader retirement and tax strategy—ensuring your plan supports both your business success and your future financial security.
Bibliography:
Cussen, M. P. (2025, March 27). Sep IRA vs. Solo 401(k): Which is better for business owners?. Investopedia. https://www.investopedia.com/articles/financial-advisors/012716/solo-401k-vs-sep-which-best-biz-owners.asp
Royal, J. (2025, July 9). Solo 401(k) vs Sep IRA: Which is better?. Bankrate. https://www.bankrate.com/retirement/solo-401k-vs-sep-ira/#solo-401k
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