The simple answer is yes and no.
You may contribute to a Solo 401(k) and SEP IRA in the same year. It all depends on the forms you use, which we’ll explain later. Your small business can maintain both plans, but there’s really no advantage to utilizing both for a business owner. Generally, unless you have full-time employees, the Solo 401(k) plan is the superior option. Once you hire employees for your business (other than a spouse or partner), you can no longer have a Solo 401(k). These plans are for owner-only businesses and the self-employed. The SEP IRA (Simplified Employee Pension) remains a solid option for expanding small businesses.
Key Takeaways
- Solo 401(k)s offer higher contribution limits and more flexibility than SEP IRAs, making them the stronger choice for most self-employed individuals.
- SEP IRAs are best suited for businesses with employees, since contributions must be made for eligible workers if the owner contributes for themselves.
- It is possible to maintain both plans, but in practice, most business owners only benefit from one (depending on whether they have employees or multiple streams of income).
What is a Solo 401(k) for Small Business Owners?
A Solo 401(k) is a retirement plan specifically designed for the self-employed. You don’t need your own business to open one. In fact, many people who have regular jobs can have one. The key is that you need some sort of self-employed income. This will generally come from a side job, oftentimes “gig” work. This may include driving for a ride-share company, hiring speaking engagements, or an Etsy store.
Of course, if you have your own business, you can get the most advantage of the Solo 401(k). The caveat is that you cannot have any full-time employees, aside from your spouse or a business partner. A full-time employee is someone who works more than 1,000 hours for you during the year. Of course, temp workers and seasonal employees can be hired, so long as they don’t exceed the hour threshold. When calculating your net earnings for contribution limits, remember to account for self employment tax, which can affect your overall contribution amount.
What is a SEP IRA?
A SEP IRA, known as a Simplified Employee Pension, is another option for the self-employed. It’s especially beneficial for small business owners who have full-time employees. There are two major differences between a Solo 401(k) and SEP IRA. First, there is “no catch-up” contribution. There is no increase in the amount you may contribute at age 50. Secondly, there isn’t an employee deferral. All contributions are based on a percentage of your annual income. Generally, it’s 20% for business owners and 25% for self-employment work.
Contributions to a SEP IRA can be made up until the due date of your business income tax return, including extensions, providing flexibility for business owners. Net self-employment income is determined after deducting half of the self employment taxes paid, which is relevant for determining contribution limits to the plan. Therefore, it’s harder to max out your contributions to the max.
If you have other employees, you must contribute on their behalf the same percentage you take yourself. However, you do not have to make contributions every year. During a down year, you may skip saving altogether. A SEP is a very cost-effective way to offer a retirement plan for small business owners. On the other hand, it doesn’t really make much sense for an owner-only business.
Learn More: How to Correctly Diversify Your Retirement Account
Contribution Limits and Tax Benefits (2025)
One of the biggest advantages of a Solo 401(k) is its higher contribution limits compared to a SEP IRA, along with the ability to make both employee and employer contributions.
- For 2025, the maximum Solo 401(k) contribution is $70,000 if you are under age 50.
- If you are 50 or older, you can make an additional catch-up contribution of $7,500, raising the limit to $77,500.
- Under SECURE 2.0 rules, individuals aged 60–63 are eligible for an enhanced catch-up contribution of $11,250, allowing a maximum contribution of $81,250.
The Solo 401(k) combines both employee and employer contributions. As the employee, you can defer up to $23,500 in 2025 (or $31,000 if age 50+). As the employer, you can contribute up to 25% of eligible compensation—but total contributions must remain within the overall limits above.
Contributions must generally be made by the tax-filing deadline for your business, including extensions, giving self-employed individuals additional flexibility.
By comparison, a SEP IRA is simpler but more limited. In 2025, SEP IRAs allow contributions of up to 25% of compensation, capped at $70,000. However, SEP IRAs do not allow catch-up contributions. This makes it harder for those age 50 and older to save as aggressively as they could with a Solo 401(k).
2025 Contribution Limits: Solo 401(k) vs. SEP IRA
| Feature | Solo 401(k) | SEP IRA |
|---|---|---|
| Contribution Limit (Under 50) | Up to $70,000 | Up to $70,000 |
| Catch-Up Contribution (50+) | Additional $7,500 (total $77,500) | ❌ Not allowed |
| Enhanced Catch-Up (Ages 60–63) | Additional $11,250 (total $81,250) | ❌ Not allowed |
| Employee Contribution (Deferral) | Up to $23,500 ($31,000 if 50+) | ❌ Not available |
| Employer Contribution | Up to 25% of eligible compensation (within total limit) | Up to 25% of compensation (within $70,000 cap) |
| Flexibility | Allows both employee and employer contributions; Roth option available | Employer-only contributions; no Roth option |
| Best For | Self-employed with no full-time employees | Small businesses with full-time employees |
When Can You NOT Do Both?
If you use a financial institution or custodian to set up your SEP IRA, you need to be aware of what form they use. If they use the standard IRS Form 5305, then you cannot also set up a Solo 401(k). This form is provided by the IRS, so it is unusual that you are limited in your options when you use it.
However, there is a workaround. You simply need to set up the SEP IRA not using the From 5305. You can essentially take the basics of the form and tweak it for your use. Of course, your financial institution must accept the form in order to be eligible. You can work with an attorney or financial planner to help design the form. Solo 401(k) plans follow the same rules as traditional 401(k) plans regarding contribution limits, withdrawals, and penalties. But again, if you have zero full-time employees, it’s probably not worth the hassle anyway!
Book a free call with a self-directed retirement specialist
- Review your self-directed retirement options
- Learn about investing in alternative assets
- Get all of your questions answered
Solo 401(k) and SEP IRA: Contribution Limits
As detailed above, the Solo 401(k) is the far superior option for the self-employed. When calculating your contribution limits, it’s important to consider your net earnings, which are determined after deducting self-employment taxes and retirement contributions. It is only when you hire non-spouse or non-owner full-time employees that a SEP IRA makes sense. Contributing to both plans makes little sense.
The only time it may be useful is if you have both a small business and other self-employed income. A SEP IRA can be set up for your business where only that income will be contributed to the plan. A self employed individual can benefit greatly from the flexibility and higher contribution limits of a Solo 401(k) plan. If you have a side job, apart from the business, you can set up a Solo 401(k) for your own use.
Example
Let’s say Phil is a part owner in a small cafe. He has two partners, and each owns 33% of the business. As a small business owner, Phil can take advantage of the SEP IRA to contribute a percentage of his business income to his retirement plan. He starts a SEP IRA for his business and decides to contribute 10% to the plan. Generally, all partners would contribute the same amount, assuming they earn compensation from the business. The business earns $200,000 during the year. Therefore, he will contribute $20,000 to his SEP IRA (10% of $200,000).
Phil also works for DoorDash on the side and earns an extra $15,000 per year. He sets up a Solo 401(k), which allows him to contribute the entire amount into the plan. In total, Phil will save $35,000 towards retirement for the year.
During a tough financial year for the cafe, Joe may elect to not contribute anything to the SEP IRA. On the plus side, he may still elect to contribute funds to his Solo 401(k), provided he has other self-employed income.
Other Circumstances
Let’s say Phil was the sole owner of the cafe and had a few full-time employees. In this case, Phil would not be able to contribute to a Solo 401(k) unless he offered the same benefit to the employees of the cafe. This is known as a controlled group. Because he owns more than 80% of each business (the cafe and his DoorDash business), he cannot “stiff” the employees.
Understanding the different retirement plans available can help you choose the best option for your business and personal financial goals.
Essentially, if you are the sole owner of a business that has full-time employees, you cannot exclude them by opening up a separate retirement plan for yourself.
Key Features of Solo 401(k) and SEP IRA
Solo 401(k) Features
A Solo 401(k) plan offers several key features that make it an attractive option for small business owners and self-employed individuals. These features include:
- Higher Contribution Limits: Solo 401(k) plans allow for higher contribution limits compared to SEP IRAs, making it easier to save for retirement. This is particularly beneficial for those looking to maximize their retirement savings.
- Tax-Deferred Growth: Contributions to a Solo 401(k) plan grow tax-deferred, meaning you won’t have to pay taxes on the earnings until you withdraw the funds in retirement. This can significantly enhance the growth of your retirement savings over time.
- Catch-Up Contributions: For those aged 50 and older, Solo 401(k) plans allow for catch-up contributions, making it easier to boost your retirement savings as you approach retirement age. Plus, for those age 60-63, you may contribute even more.
- Employer Contributions: As the employer, you can make tax-deductible contributions, reducing your taxable income. This dual role of employer and employee can be highly advantageous for small business owners.
- Employee Contributions: As the employee, you can make elective deferrals, further reducing your taxable income. This flexibility allows you to tailor your contributions based on your financial situation.
- Roth Contributions: Solo 401(k) plans allow for Roth contributions, which are made with after-tax dollars and grow tax free. This can be a strategic option for those who anticipate being in a higher tax bracket in retirement.
- Loan Provisions: Solo 401(k) plans allow for loans, which can be used to cover unexpected expenses or financial emergencies. This feature provides an additional layer of financial security.
Overall, Solo 401(k) plans offer a range of features that make them an attractive option for small business owners and self-employed individuals looking to save for retirement. With higher contribution limits, tax-deferred growth, and the ability to make both employer and employee contributions, solo 401(k) plans provide a robust framework for retirement planning.
Self-Directing Your Plan
Lastly, we wanted to mention the benefits of self-directing your Solo 401(k) and SEP IRA plans. The benefits of opening your plan with IRA Financial is that you can have checkbook control of your funds. This allows you to make both traditional investments, in addition to alternative investments, such as real estate, precious metals and cryptocurrencies, like Bitcoin.
As a business owner, having checkbook control of your retirement funds allows you to make timely and strategic investment decisions. Further, with checkbook control, you never need to ask for permission to invest. A bank account is associated with your plan and can be used to make investments without a middleman. This allows you to make any investment you want in a timely manner. The checkbook control structure can be used with both a Solo 401(k) and SEP IRA.
If you have any questions about either plan, please contact us to discuss. We can help decide if a Solo 401(k) or SEP IRA is right for you. In certain circumstances, you may want to contribute to both. As always, you should work with a financial advisor to come up with a financial plan that fits your needs.
Choose the Right Plan for Your Business
Whether you’re self-employed with no employees or running a growing small business, selecting the right retirement plan can make a major difference in your future savings. A Solo 401(k) may maximize your contributions, while a SEP IRA can provide flexibility for businesses with employees.
👉 Schedule a free consultation with an IRA Financial specialist to find out which plan best fits your goals.
👉 Open a Self-Directed Solo 401(k) or SEP IRA today and start investing with more control.
Invest Freely. Retire Confidently.
