Solo 401(k) Vs SEP-IRA: Which Plan Lets Me Save More At My Income

At almost any income level, a Solo 401(k) lets you save more because you can contribute both as the employee ($23,000 in 2024, plus catch-up) and as the employer (up to 25% of compensation), whereas a SEP-IRA only allows the employer contribution. The Solo 401(k) pulls ahead dramatically at lower incomes and stays ahead until very high incomes where both plans cap out at the same $69,000 total limit.

The math that makes the solo 401k vs SEP-IRA win at lower incomes

The key is that the $23,000 worker deferral is a flat dollar amount, not a percentage of income. On $50,000 of net self-employment income, a SEP-IRA allows a maximum company-side deposit of 20% of your net profit (after deducting half of self-employment tax), which works out to about $9,246. A Solo 401(k) gives you that same $9,246 as the business-owner side, but then you add the full $23,000 worker deferral on top, for a total of $32,246. That’s nearly 3.5 times more money going into retirement from the same income.

At a net-earnings level that the IRS currently caps at $100,000, the math still heavily favors the Solo 401(k). The SEP-IRA caps at roughly $18,587 (20% of net profit), while the Solo 401(k) lets you deposit that same $18,587 plus the $23,000 worker deferral, totaling $41,587. Even at a compensation level the IRS currently caps at $150,000, where the SEP-IRA company-side deposit grows to about $27,871, the Solo 401(k) still wins: $27,871 + $23,000 = $50,871. The worker deferral acts like a turbocharger that keeps working until you hit the $69,000 overall cap, which doesn’t happen until your net earnings reach roughly $230,000 with the company-side deposit alone. For anyone earning under $200,000, the Solo 401(k) is not just better, it’s categorically superior by a margin of $20,000 or more.

Stop reading and open a tab for your plan provider now. Book a Solo 401(k) adoption before December 31 so your worker deferral is valid for this tax year. Arrive at the provider’s “open a new plan” page, use the standard adoption agreement, and skip any add-on trust-account upsells until you confirm the core plan is in place. Enter the main entrance of your provider’s dashboard and look for the “employee deferral election” form; complete it before year-end, because that deadline is absolute.

The income point where they tie and the SEP-IRA's only edge

Once your net self-employment income reaches about $276,000, both plans hit the identical $69,000 total deposit limit for 2024. At that level, the 25% company-side deposit on the Solo 401(k) side equals $69,000, and the SEP-IRA’s 20% of net profit also equals $69,000. From that point upward, the two plans are mathematically indistinguishable on deposit limits, you simply cannot put away more than $69,000 in either vehicle, regardless of whether your income is $300,000 or $3 million.

The SEP-IRA’s only real edge at that high-income level is administrative simplicity. A SEP-IRA requires no annual filing with the IRS (unless you have other retirement accounts triggering Form 5500), no plan document to adopt beyond a one-page IRS Form 5305-SEP, and no separate worker deferral election to track. But that simplicity rarely justifies choosing it over a Solo 401(k) even at $276,000+, because the Solo 401(k) costs nothing extra to maintain and gives you the optionality of making worker deferrals in future years if your income drops. You’re giving up flexibility for a tiny paperwork savings, and that’s a poor trade for most self-employed professionals.

If your income already exceeds that tie point, book a fifteen-minute calendar hold this week to compare your current-year net-profit projection against the $276,000 threshold. Arrive at your tax-prep software’s “self-employed retirement plans” module and run both scenarios side-by-side. Skip the SEP-IRA setup wizard unless you confirm your income will stay above the tie point indefinitely and you never plan to add a team member.

When you accidentally pick the wrong plan because of bad timing

The most common failure case is hiring a part-time team member mid-year after setting up a SEP-IRA. With a SEP-IRA, you must contribute the same percentage of pay for every eligible team member, so hiring a part-timer whose annual pay the employer currently sets at $15,000 forces you to either contribute 25% of their salary ($3,750) or drop your own contribution percentage to match. With a Solo 401(k), if you hire that same team member, you can simply stop making company-side deposits for yourself and keep your worker deferral, or you can amend the plan to exclude that team member by class, but only if you set up the Solo 401(k) before the hiring date. If you already made SEP-IRA deposits for the year, you can’t retroactively convert to a Solo 401(k) and undo the mistake.

Another timing trap involves misunderstanding the 25% deposit limit. Many self-employed people read “25% of compensation” and assume it applies to gross revenue. It doesn’t. For a sole proprietor, the company-side deposit is 20% of net profit after deducting half of self-employment tax. On $100,000 of gross revenue with $30,000 in business expenses, your net profit is $70,000, and your SEP-IRA deposit is 20% of that minus the SE tax deduction, around $12,932, not $17,500. A Solo 401(k) doesn’t fix this miscalculation, but it softens the blow because the $23,000 worker deferral still works. If you accidentally set up a SEP-IRA and then realize you’ve been overestimating your deposit limit, you’re stuck with a lower retirement savings rate and no easy fix until next year. That’s why the “solo 401(k) vs sep-IRA” decision isn’t just about the numbers on paper, it’s about whether you can absorb a mid-year change in your workforce or income without losing retirement savings headroom.

Before you hire anyone, even a contractor who might be reclassified, book a thirty-minute review of your plan document’s eligibility exclusions. Arrive at your plan provider’s “plan amendment” entrance and confirm you can exclude part-time or seasonal staff by class. Skip the generic SEP adoption agreement entirely if there is any chance your headcount will grow beyond one.

Frequently asked questions

Can I contribute to a Solo 401(k) if I also have a W-2 job?

Yes, but your $23,000 worker deferral is shared across all 401(k) plans, including your employer’s plan. If you already max out your W-2 401(k) at $23,000, you can only make company-side deposits to the Solo 401(k), which still beats a SEP-IRA.

What if my income fluctuates above and below $276,000 year to year?

You can have both a Solo 401(k) and a SEP-IRA, but you cannot exceed the combined $69,000 limit across both. In practice, you’re better off using the Solo 401(k) every year, since it gives you the worker deferral option in lean years and still hits the same cap in fat years.

Can I set up a Solo 401(k) after December 31 for the current tax year?

No. You must open the Solo 401(k) by December 31 of the tax year to make worker deferrals for that year, though you have until the tax filing deadline (including extensions) to make company-side deposits. A SEP-IRA, by contrast, can be opened as late as the tax filing deadline.

Does the “sep-IRA vs simple IRA” comparison change anything for a solo business?

Yes. A SIMPLE IRA has a lower deposit limit (the IRS currently caps this at $16,000) and forces you to make either a 2% non-elective deposit or a 3% match for yourself. For a solo operation, a SEP-IRA always beats a SIMPLE IRA on deposit limits, but a Solo 401(k) beats both. The “sep-IRA vs simple IRA” question only matters if you have team members and can’t use a Solo 401(k).

The worker deferral inside a Solo 401(k) is a flat-dollar turbocharger that stays fully usable until your net self-employment earnings cross roughly $230,000, making the plan categorically superior to a SEP-IRA by a margin of $20,000 or more for anyone earning under $200,000, and that margin cannot be replicated by any other single-plan structure available to a solo business owner.