Solo 401(k) or SEP IRA? Choosing the right self-employed retirement plan for 2025

Gustaf Rounick, CFP®, ChFC®
Jul 22
5 min read

Updated: Jul 24

Flat-style illustration of a freelancer at a desk weighing two retirement options—Solo 401(k) and SEP IRA—for the 2025 tax year.

Why this decision matters

The plan you pick controls how much you can shelter from tax, whether you can build Roth dollars, and how much paperwork lands on your desk. For a one-person business, the two heavy-hitters are the Solo 401(k) and the SEP IRA. Below is a guide, updated with the 2025 limits, to help you make an informed decision.

Am I Even Eligible? The 30-Second Checklist

Before you compare contribution limits, make sure you can even open the plan:

Business structure: Sole proprietors, single-member LLCs, partnerships, S-corps, and C-corps all qualify for either plan as long as there is self-employment income.
No non-spouse employees for a Solo 401(k): If anyone other than you or your spouse works more than 1,000 hours a year, the Solo 401(k) is off the table. A SEP IRA can still work—but you must contribute the same percentage for each eligible worker. (IRS)
Earned income required: You need “net self-employment income” or W-2 wages to fund either plan; investment or rental income alone won’t cut it.
Age 18+ and alive: There is no upper age limit; as long as you continue to earn an income, you can continue contributing.

2025 contribution limits

Solo 401(k) – You wear two hats:
- Employee hat: You may defer up to $23,500 of your net self-employment income (or W-2 wages if you run an S-corp). If you’re 50+, you can add another $7,500 catch-up. [1]
- Employer hat: Your business may add up to 20 % of net profit (sole prop/LLC) or 25 % of W-2 wages (S-corp).
- All-in ceiling: Combined employee + employer dollars cannot top $70,000 for 2025. [2]
SEP IRA – One hat only (employer):
- Contribute up to 25 % of compensation, but never more than $70,000. If you file Schedule C, the effective rate is 20 % of net profit after the half-SE-tax deduction. [4]
- No employee deferrals, no catch-ups, and no Roth option.

Compensation cap: Both plans ignore earnings above $350,000 when they run the math. [3]

How the Tax Deduction Works

Plain-English math for Solo owners

Employee deferral (Solo 401(k) only): Lowers your adjusted gross income (AGI) today if you choose pre-tax, or skips the deduction if you choose Roth. Either way, it still reduces your 20% QBI deduction because it lowers “qualified business income” dollar for dollar.
Employer contribution: Deductible even if you opt for a Roth employee slice. Sole props claim it on Schedule 1, line 16. S-corps deduct it on the corporate return.
Why “20 % vs 25 %”? Schedule C owners must first subtract half of the self-employment tax before multiplying by 20%. S-corps use the simpler 25 % of W-2 wages formula.
Roth reminder: Roth dollars won’t save tax today, but they build a tax-free cushion for retirement—handy if your bracket may be higher later.

Roth option and plan loans

Solo 401(k) lets you route the employee deferral to Roth while keeping the employer share pre-tax. Many providers also allow participant loans—handy if you need short-term liquidity.
SEP IRA is always pre-tax and never offers loans.

Set-up and funding deadlines

Solo 401(k) must be in place by December 31 of the tax year. Employee deferrals have to be elected (and, if you’re an S-corp, deposited) by that date. Employer dollars can wait until the tax-filing deadline plus extensions.
SEP IRA can be opened and funded up to your tax-filing deadline, including extensions. Great for owners with lumpy cash flow.

Running Payroll? Solo 401(k) vs SEP for S-Corps

When you pay yourself a W-2 salary, the SEP limit is 25 % of that wage. That cap can pinch if you run a “reasonable-but-lean” salary to maximize pass-through profits. A Solo 401(k) circumvents the bottleneck by letting you:

Defer the first $23,500 (plus $7,500 if 50+) as “employee,” regardless of salary size.
Add 25 % of salary on top as the employer share.

Break-even guide: If your S-corp salary is under roughly $94,000, the Solo 401(k) almost always produces more room because of that employee slot.

Two hypothetical examples

Example A – Independent Graphic Designer

Net Schedule C profit: $180,000 Solo 401(k): Defers $23,500 as “employee” + roughly $28,600 as “employer” = $52,100 total SEP IRA: Contributes 20 % × $180,000 ≈ $45,000Result: Solo 401(k) wins by giving her an extra employee slot on top of the employer share.

Example B – Wedding Photographer

Net Schedule C profit: $90,000 Solo 401(k): Defers $23,500 + about $17,900 employer = $41,400 total SEP IRA: 20% × $90,000 = $22,500Result: Solo 401(k) almost doubles her tax-favored space—typical for profits between $80k and $120k.

Five-question checklist

Will you add employees soon?
Solo 401(k)s are for owner-only firms (plus spouse). A SEP continues after you hire, but every eligible worker must receive the same percentage you give yourself.
Want Roth dollars?
Only the Solo 401(k) offers a Roth lane.
Is cash flow unpredictable?
SEPs let you postpone the contribution decision until tax time.
Age 50 or older?
Solo 401(k) is the sole way to claim the $7,500 catch-up.
Comfort level with paperwork?
Once Solo 401(k) assets top $250,000, you file the one-page Form 5500-EZ each year. A SEP IRA has no annual filing requirement.

Simple rule of thumb

Profit under about $170 k and no staff on the horizon → Solo 401(k) generally delivers the bigger deduction (and optional Roth).
Profit well above $200,000 or employee hiring is likely → SEP IRA is often simpler and may let you max out just as easily.

Next steps

Still unsure? Schedule a short call and we’ll run your numbers line by line to see which plan saves you more tax this year—and builds the retirement nest egg you want.

Solo 401(k) vs SEP IRA: Mini-FAQ

Can I have a day-job 401(k) and a Solo 401(k)?

Yes. The $23,500 employee cap is shared across all plans, but the employer space on the Solo is still available.

What if I hire a part-timer for six months?

If they work 1,000 hours or more in a year (or meet the new long-term part-time rules), the Solo 401(k) must be converted to a regular 401(k) or shut down. A SEP would require giving them the same percentage you give yourself.

Can I roll old IRAs into a Solo 401(k)?

Often yes—handy if you want to avoid the pro-rata rule before a back-door Roth.

Gustaf Rounick, CFP®, ChFC®

Disclosure

The information presented in this article is for educational and general informational purposes only and does not constitute personalized investment, tax, accounting, or legal advice. All examples are hypothetical and are intended to illustrate the mechanics of Solo 401(k) and SEP IRA rules for the 2025 tax year; they do not represent the actual performance of any client account. Contribution limits, tax laws, and regulatory guidance can change without notice. You should consult qualified tax and legal professionals as well as a fiduciary financial advisor before implementing any strategy discussed herein. Past performance, if referenced, is not indicative of future results. Rounick Capital Management LLC (d/b/a Westlight Wealth) is a California registered investment adviser; registration does not imply a certain level of skill or training. All investing involves risk, including the potential loss of principal.