SEP-IRA vs Solo 401k: The $60,000 Decision Nobody Explains Right

The two accounts in a single paragraph each

SEP-IRA: Simplified Employee Pension. You contribute up to 20% of net self-employment income (or 25% of W-2 wages for S-Corp owners), capped at $70,000 for 2025. 100% of the contribution is an "employer" contribution. Simple to set up. No employee contribution option.

Solo 401k: One-participant 401k. Contribute up to $23,500 "employee" deferral (2025) plus up to 25% employer contribution, combined cap $70,000. Plus catch-up $7,500 if age 50+. More paperwork, but much larger contribution room at low-to-mid incomes.

The math: where Solo 401k wins

At moderate income, the Solo 401k's employee deferral lets you contribute far more of your income than the SEP's employer-only structure.

Net SE Income	SEP-IRA max	Solo 401k max	Solo 401k advantage
$50,000	$9,293	$32,793	+$23,500
$80,000	$14,869	$38,369	+$23,500
$120,000	$22,303	$45,803	+$23,500
$200,000	$37,171	$60,671	+$23,500
$350,000	$65,050	$70,000	+$4,950
$500,000+	$70,000 (cap)	$70,000 (cap)	Tie

Both amounts use the correct 20% rate for self-employed (not 25%) and assume no W-2 wages. Why 20% and not 25%.

At $80k/year net SE income, Solo 401k lets you contribute $23,500 more than a SEP-IRA. At a 24% marginal rate + SE tax interaction, that's about $6,000 more in tax savings every year.

Why everyone still uses SEP-IRA

• Simpler setup (5-minute form at most brokers)
• No annual Form 5500-EZ filing (Solo 401k requires it once balance exceeds $250k)
• Works until tax filing deadline (including extension) — you can open and fund a SEP-IRA as late as October 15 for the prior tax year
• Employers often default to SEP because "it covers future employees too" (it does, but that's actually a downside — see below)

When SEP-IRA still beats Solo 401k

• You have very high income and just want the max. Both hit $70,000 at high income. SEP is simpler.
• You're setting up for last year after it ended. SEP can be opened and funded for the prior year until October 15. Solo 401k had to be established by Dec 31 of the tax year — a 2024 Solo 401k needs to exist before 2025 began.
• You hate paperwork. SEP-IRAs require zero annual filings.
• You plan to hire employees soon. SEP includes all eligible employees (you'd have to contribute for them too). Solo 401k can only have you and a spouse.

Solo 401k's other advantages

The catch nobody mentions: the "pro-rata rule"

If you have a SEP-IRA and want to do a backdoor Roth, the pro-rata rule taxes a portion of your conversion based on pre-tax SEP balances. A Solo 401k doesn't count against the pro-rata rule — backdoor Roth stays clean.

This alone is why many high-earners roll SEP-IRAs into Solo 401ks.

Provider comparison (2025)

Provider	SEP-IRA fee	Solo 401k fee	Loan support
Fidelity	$0	$0	No
Schwab	$0	$0	No
Vanguard	$0	$20/fund/yr	No
E*TRADE	$0	$0	Yes
My Solo 401k Financial	—	$125/yr after setup	Yes + full flexibility

The big-brokerage Solo 401k plans don't support loans. If you want loan capability, E*TRADE is the only free big-box option — or pay a specialty provider for a customized plan.

Decision tree in one flowchart

1. Net SE income under $50k? → SEP-IRA (contribution room similar, paperwork lighter)
2. Net SE income $50k–$250k? → Solo 401k (much larger room)
3. Very high income, no W-2 income, hate paperwork? → SEP-IRA
4. Want loan capability? → Solo 401k at E*TRADE or specialty provider
5. Want Roth option or planning backdoor Roth? → Solo 401k
6. Setting up after Dec 31 for the prior year? → SEP-IRA (Solo 401k had to exist by Dec 31)