SEP-IRA vs. Solo 401(k): Which Retirement Plan Actually Saves You More

For a self-employed business owner, retirement contributions do double duty: they build real savings, and they're deductible in the year contributed, directly reducing taxable income. The two most common options — a SEP-IRA and a Solo 401(k) — both aim at that same goal, but they calculate the maximum contribution differently, and which one produces the bigger deduction depends on your specific numbers rather than a fixed rule.

A SEP-IRA lets a sole proprietor or single-member LLC contribute up to roughly 20% of net self-employment earnings (or 25% of compensation for an S-corp), up to the combined annual maximum. It's simple to set up and simple to administer, which is exactly why it's the default most business owners land on without comparing it to the alternative.

A Solo 401(k) combines two contribution types: an employee deferral (a flat dollar amount, regardless of income level) plus an employer profit-sharing contribution calculated the same way as a SEP. Because the employee deferral doesn't depend on income, a Solo 401(k) can produce a meaningfully larger total contribution than a SEP at moderate income levels — specifically because it front-loads a fixed deferral before the percentage-based piece is even calculated.

For an S-corp owner, this gap tends to be more pronounced. Since S-corp contributions are based on W-2 salary rather than total profit, a business owner paying themselves a modest reasonable salary can hit the combined contribution maximum at a meaningfully lower salary level with a Solo 401(k) than with a SEP alone — often the deciding factor in which plan actually gets recommended.

There isn't a universal answer, because the comparison depends on your entity structure, your income level, your age (catch-up contributions add another layer for owners 50 and older), and how much administrative complexity you're willing to take on — a Solo 401(k) has an annual filing requirement once plan assets cross a certain threshold, which a SEP doesn't. This is a calculation worth running with real numbers each time your income changes meaningfully, not a decision made once and left alone for a decade.