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Solo 401(k) vs SEP IRA: Which one is better?

When it comes to choosing a retirement plan, those who are self-employed are often faced with this question: “Do I go with a SEP IRA or a Solo 401(k)?”

While both investment accounts are good options for investing in retirement, they do have their differences that should be considered in the decision-making process.

Take a look at the two options below to discover the advantages and disadvantages, and determine for yourself which one you think will suit you best. 

Solo 401(k)

Who is included: With a Solo 401(k), both you and your spouse may participate in the plan. 

Contributions: The benefit of a Solo 401(k) is that you can make contributions as both the employer and the employee, making the total contribution limit much higher than that of a SEP IRA. 

As of 2021, the total contribution limit that can be made as an employee is $19,500, or $26,000 for those aged 50 or older. As an employer, you can contribute up to 25% of compensation as defined by the plan. Total contribution limits for the plan, as of 2021, cannot exceed $58,000 or $64,500 for those aged 50 or older. 

(If you’d like more detailed information about Solo 401(k) contributions and contribution limits, you can visit the IRS webpage about Solo 401(k) plans here.)

Taxes: With a Solo 401(k), you can either choose between a traditional or a Roth 401(k). 

Contributions made to a traditional 401(k) are deducted from your paycheck before taxes, reducing your taxable income and taxes for that year. Taxes will have to be paid on withdrawals.  

Roth 401(k) contributions are deducted from your paycheck after taxes, therefore, they do not reduce your taxable income, and you will not have to pay taxes on withdrawals.

Loans: Loans are permitted from a Solo 401(k), however, most financial advisors strongly recommend that you avoid this at all costs. The maximum amount you could borrow from your 401(k) is 50% of your vested account balance or $50,000, whichever is less. 

(Coronavirus-related loans, which could only be made between January 1, 2020 to December 30, 2020, follow separate rules. Those rules can be accessed here.)

Speak to a financial advisor about the risks and/or benefits of pulling a loan from your 401(k). 


Who is included: Under a SEP IRA, you and your employees may participate in the plan. If your employees meet the IRS guidelines, they must be included in the plan.

Contributions: Only employers can make contributions to a SEP IRA, not employees. In the case that you have employees, you must contribute the same percentage of salary to each employee’s account. 

As of 2021, contributions cannot exceed 25% of the employee’s compensation, or $58,000, whichever is lesser. 

Catch-up contributions for those 50 and older, as well as Roth contributions, are not permitted in a SEP IRA. 

(If you’d like more detailed information about SEP IRA contributions and contribution limits, you can visit the IRS webpage about SEP IRA plans here.)

Taxes: Since all contributions are made with pre-tax dollars, taxes must be paid on all withdrawals. Depending on your anticipated tax bracket later on in life, you may end up paying more taxes than you’d like. Consult a tax professional to determine if this is the right investment vehicle for you. 

Loans: Loans cannot be taken out from a SEP IRA and the assets may not be used as collateral.

If any money is taken from an IRA account (including SEP IRA), the IRA is no longer an IRA and the value of that account is then included as income. 

In Summary

When weighing out the differences, a Solo 401(k) has all the same benefits as a SEP IRA, and more, making it a good option for the self-employed. A SEP IRA on the other hand can be a good option for small business owners who are looking to provide their full-time employees with a retirement account.

Ready to get started with your Solo 401(k)? Contact us today to get set up, or learn more about our affordable and hassle-free 401(k) plans.

Photo by Good Faces on Unsplash.

*This material has been prepared for informational purposes only, and is not intended to provide, and should not be relied on for tax, legal, or accounting advice. Saveday makes no warranties with regard to such information or results obtained by its use and disclaims any liability arising out of your use of, or any tax position taken in reliance on, such information. Consult an attorney or tax professional regarding your specific situation and before engaging in any transactions. The information may not reflect the most current legal developments and is not guaranteed to be complete, correct, or up-to-date.