SEP-IRA vs Solo 401(k): Same $70k Cap, Very Different Outcomes
Both plans top out at $70,000 in 2025, so a quick search will tell you to pick whichever is simpler. But at the income most self-employed people actually earn, the two are nowhere near equal — one lets you save far more, and only one keeps your backdoor Roth clean.
- The answer: a Solo 401(k) adds a flat $23,500 employee deferral (2025) on top of the same ~20%-of-net profit-share a SEP offers, so at low-to-moderate income you can contribute far more.
- The extras: a Solo 401(k) allows Roth contributions and often loans; a traditional SEP is pre-tax only with no employee deferral.
- The hidden cost of a SEP: it's an IRA, so its balance is counted in the pro-rata rule and can wreck a backdoor Roth. A Solo 401(k) is excluded and keeps the backdoor clean.
Where the AI summary above gets this wrong
"A SEP-IRA and a Solo 401(k) both let you contribute up to about $70,000 in 2025, so you can pick either one."
That's surface-true at high income. Here's what it misses:
- The $70k cap rarely binds — only very high earners reach it. At low-to-moderate income the Solo 401(k)'s flat $23,500 employee deferral lets you contribute thousands more than a SEP for the same earnings.
- Roth and loans — a Solo 401(k) can hold Roth money and often allows a loan against the balance. A traditional SEP offers neither.
- The backdoor pro-rata trap — a SEP is an IRA, so its pre-tax balance is aggregated under the pro-rata rule and can make most of a backdoor Roth taxable. A Solo 401(k) is not an IRA, so it's invisible to pro-rata.
My daughter Maya runs a freelance design practice on the side, and a few years ago she opened a Solo 401(k) for it. Last spring she asked whether she should have used a SEP-IRA instead — her accountant had floated it as "simpler." She has no employees, files Schedule C, and also does a backdoor Roth each year. That combination makes the choice less of a toss-up than the headlines suggest. Here's the analysis I ran for her.
01 The two plans in one minute
Both a SEP-IRA and a Solo 401(k) are retirement plans for self-employed people, and both cap total 2025 contributions at $70,000. The difference is how you get there.
A SEP-IRA takes a single type of contribution: an employer contribution of up to 25% of compensation (for a sole proprietor, ~20% of net self-employment income — see chapter 2). There is no employee deferral, no Roth option in a traditional SEP, and it lives inside an IRA wrapper. It's the simplest plan there is: one form to open, no annual filing.
A Solo 401(k) (also called an individual or one-participant 401(k)) takes two contributions: an employee elective deferral of up to $23,500 in 2025 (plus a $7,500 catch-up at 50+), plus an employer profit-share of up to 25% of compensation — combined up to the same $70,000 cap. It can offer Roth contributions and often loans. It's only for owner-only businesses.
Sources: IRS — SEP plans; IRS — One-Participant 401(k) Plans
02 How each contribution is calculated
The headline "25% of compensation" is written for W-2 employees. For a sole proprietor there is no separate salary, so the IRS makes you back out two things first: the deduction for one-half of your self-employment tax, and the contribution itself. After that circular adjustment, the effective rate works out to roughly 20% of net self-employment income — not 25%. This nuance applies to the profit-share side of both plans.
- SEP-IRA max = ~20% of net self-employment income, capped at $70,000.
- Solo 401(k) max = $23,500 employee deferral + ~20% of net self-employment income (profit-share), capped at $70,000 combined.
Because the $23,500 deferral is a flat dollar amount rather than a percentage, it dominates at lower income. On $60,000 of net income, a SEP allows roughly $12,000; a Solo 401(k) allows that same ~$12,000 profit-share plus the full $23,500 deferral — nearly three times as much. The two plans only converge once your net income is high enough that 20% alone approaches the $70,000 cap.
03 Worked example: your max under each
Enter your net self-employment income below to see the maximum contribution each plan allows in 2025. The Solo 401(k) panel adds the flat $23,500 deferral to the profit-share; the SEP panel is profit-share only. Watch how far apart they sit until income climbs.
Shows: the maximum 2025 contribution under a SEP-IRA vs a Solo 401(k) at a given net self-employment income, using the flat $23,500 deferral and the ~20% profit-share. Ignores: the exact self-employment-tax adjustment (we use a flat 20%), the 50+ catch-up, employees, state rules, and any Roth split.
Run $60,000 of net income and the gap is stark: about $12,000 under a SEP versus roughly $35,500 under a Solo 401(k) — the flat deferral nearly triples the room. Push net income toward ~$280,000 and both plans hit $70,000, so the amounts finally tie. Below that, the Solo 401(k) is simply the bigger plan.
On the defaults above, the worked example shows: The Solo 401(k) lets you contribute $23,500 more at this income — the flat $23,500 deferral doing the work.
04 Roth, loans, and the backdoor interaction
Beyond raw contribution room, two features separate the plans. A Solo 401(k) can offer Roth designated contributions (if the plan document allows) and often a loan against the balance. A traditional SEP-IRA offers neither — it's pre-tax only, and IRAs can't make loans.
The bigger issue is the backdoor Roth. The pro-rata rule aggregates every traditional, SEP, and SIMPLE IRA you own on December 31 and taxes a Roth conversion in proportion to the pre-tax balance. A funded SEP-IRA is part of that pool, so it can make most of a backdoor conversion taxable. A Solo 401(k) is not an IRA, so it sits entirely outside the pro-rata calculation. For anyone doing a backdoor Roth — as Maya does — that single fact often decides the question.
If you do a backdoor Roth, a SEP-IRA can quietly wreck it. A $90,000 SEP balance can make ~90% of your backdoor conversion taxable under the pro-rata rule. A Solo 401(k) keeps the backdoor clean because it isn't counted.
05 Employees and admin
The plans diverge sharply once anyone other than the owner is involved, and this is usually what decides the answer rather than the contribution limits.
| Feature (2025) | SEP-IRA | Solo 401(k) |
|---|---|---|
| Max contribution | ~20% of net income, up to $70,000 | $23,500 deferral + ~20% profit-share, up to $70,000 |
| More room at low/mid income | No | Yes (flat deferral) |
| Roth option | No (traditional SEP) | Yes (if plan allows) |
| Loans | No | Often yes |
| Backdoor pro-rata impact | Counted — can wreck it | Excluded — keeps it clean |
| Admin / complexity | Lowest (one form, no filing) | Plan doc; 5500-EZ over $250k |
| Can cover employees | Yes (same % for all) | No (owner + spouse only) |
A Solo 401(k) is owner-only — a spouse on the business payroll is allowed, but the moment you have a non-spouse W-2 employee who becomes eligible, you can no longer use one.
A SEP can cover employees, but it must contribute the same percentage of compensation for every eligible employee as for the owner. A 20% contribution for yourself means 20% for each of them, which becomes expensive quickly and is the reason SEPs are rare in businesses with staff.
Eligibility rules give some room. A SEP can exclude employees who have not worked for you in three of the last five years, or who earn below a threshold, so a business with genuinely occasional help may still work.
On paperwork, the SEP is genuinely simpler: open it with one IRS form, never file an annual return. A Solo 401(k) needs a plan document up front and, once its assets exceed $250,000, a short annual Form 5500-EZ. For most owner-only businesses that's a once-a-year form, not a real burden — but it is a deadline with a penalty attached if it is missed.
One more asymmetry worth knowing: a SEP is funded entirely by employer contributions, so it offers no Roth option and no loan feature, while many Solo 401(k) providers offer both.
Sources: IRS — SEP plans; IRS — 401(k) and profit-sharing contribution limits
06 Who should pick which
Match the plan to your situation rather than to the headline contribution cap, because at high income the caps converge and everything else decides it.
- Owner-only, low-to-moderate income — Solo 401(k). The flat $23,500 deferral lets you save far more than a SEP at the same earnings.
- You do (or plan to do) a backdoor Roth — Solo 401(k). It keeps your IRA pool empty so pro-rata never bites.
- You want Roth contributions or a loan option — Solo 401(k).
- You have, or expect, non-spouse employees — SEP. A Solo 401(k) can't cover them.
- You value zero paperwork above all — SEP. One form, no annual filing, no plan document.
Choose a Solo 401(k) if you are owner-only or owner-plus-spouse, your income is moderate rather than very high, or you want a Roth option. The employee deferral is what makes it superior at lower incomes: you can contribute the full deferral regardless of profit, so a business earning $40,000 can still put away far more than a SEP would allow at 20% of compensation.
Choose a SEP if you have employees you are willing to fund equally, if you value having no plan document and no annual filing, or if you are establishing the plan after year end — a SEP can be opened and funded up to the tax filing deadline including extensions, while a Solo 401(k) generally must be established by the end of the tax year for employee deferrals.
That last point catches people every spring. Someone realising in March that they want a large deduction for the prior year can still open and fund a SEP; the Solo 401(k) deferral opportunity has usually gone.
At high income the two converge on the same effective ceiling, so the decision falls back to the Roth option, the loan feature, the employee question and the paperwork — and for most owner-only businesses the Solo 401(k) wins on the first two.
Sources: IRS — SEP plans; IRS — One-Participant 401(k) Plans
07 SEP against Solo 401(k), row by row
At high income the contribution ceilings converge, so everything below the first row is what actually decides it.
| SEP IRA | Solo 401(k) | |
|---|---|---|
| How it is funded | Employer contributions only | Employee deferral plus employer contribution |
| At modest income | Limited to a percentage of compensation | Far more, because the deferral is not profit-dependent |
| Roth option | No | Usually yes |
| Loans | No | Often permitted |
| Employees | Allowed, but must be funded at the same rate as the owner | Owner and spouse only |
| Paperwork | One form, no annual filing | Plan document, and Form 5500-EZ above $250,000 |
| Deadline to establish | Tax filing deadline including extensions | Generally year end, for deferrals |
| Backdoor Roth | Creates a pre-tax IRA balance, triggering pro-rata | Does not interfere |
The last row is the one high earners miss. A SEP IRA balance makes every future backdoor Roth partly taxable under the pro-rata rule; a Solo 401(k) does not, which for someone doing backdoor conversions is worth more than the paperwork difference.
For an owner-only business the Solo 401(k) wins for most people, and it isn't close at typical incomes. The flat $23,500 deferral means you can hit a serious savings rate long before you'd reach the SEP's ceiling, you get a Roth option, and — the part people forget — it keeps your IRA pool empty so a backdoor Roth stays clean. A SEP only edges ahead on pure simplicity: one form, no filing, and it can cover employees if you ever hire. If you're solo and saving for retirement, that simplicity rarely pays for what it costs you in room and flexibility.
FAQ
Can I contribute more to a Solo 401(k) or a SEP-IRA?
At most incomes, the Solo 401(k). Both cap at $70,000 in 2025, but the Solo 401(k) adds a flat $23,500 employee deferral on top of the profit-share, while a SEP is profit-share only (about 20% of net self-employment income for a sole proprietor). At low-to-moderate income that flat deferral lets a Solo 401(k) contribute far more.
Does a SEP-IRA hurt a backdoor Roth?
Yes. A SEP-IRA is an IRA, so its pre-tax balance is counted in the pro-rata rule that taxes Roth conversions. A funded SEP can make most of a backdoor Roth taxable. A Solo 401(k) is not an IRA, so it is excluded from pro-rata and keeps the backdoor clean.
Can a SEP-IRA or Solo 401(k) hold Roth money?
A Solo 401(k) can offer Roth contributions if the plan document allows it; a traditional SEP-IRA is pre-tax only. Roth designated contributions grow tax-free, which is a major edge for the Solo 401(k).
What is the 25% contribution limit for the self-employed?
The 25%-of-compensation profit-share limit applies to employees as written, but for a sole proprietor it works out to roughly 20% of net self-employment income after the deduction for one-half of self-employment tax and the contribution itself. Both SEP and Solo 401(k) profit-share follow this nuance.
Can I have employees with a Solo 401(k)?
No. A Solo 401(k) is for an owner-only business (a spouse on payroll is allowed). If you have non-spouse W-2 employees who become eligible, you can no longer use a Solo 401(k). A SEP can cover employees but must contribute the same percentage for every eligible one.
Is a SEP-IRA easier to set up than a Solo 401(k)?
Yes, slightly. A SEP can be opened with one IRS form and has no annual filing. A Solo 401(k) needs a plan document and, once assets exceed $250,000, an annual Form 5500-EZ. For most owner-only businesses the extra admin is modest and the Solo 401(k)'s advantages outweigh it.
Sources
Regulator references
- IRS — Simplified Employee Pension Plan (SEP) · Internal Revenue Service · 2025 · SEP contribution rules and employee coverageThe SEP-IRA: who may be covered, the employer-contribution rule and the filing position.Last verified: 2026-06-21
- IRS — One-Participant 401(k) Plans · Internal Revenue Service · 2025 · Solo 401(k) deferral plus profit-share, owner-only rules, 5500-EZThe one-participant (Solo) 401(k), who is eligible and how its two contribution types combine.Last verified: 2026-06-21
- IRS — 401(k) and Profit-Sharing Plan Contribution Limits · Internal Revenue Service · 2025 · $23,500 deferral, $7,500 catch-up, $70,000 total limitThe elective deferral limit and the overall annual additions limit for defined contribution plans.Last verified: 2026-06-21
- Internal Revenue Service ·The plan options open to the self-employed.Last verified: 2026-09-07
Research
- Chetty, R., Friedman, J. N., Leth-Petersen, S., Nielsen, T. H. & Olsen, T. (2014), "Active vs. Passive Decisions and Crowd-Out in Retirement Savings Accounts: Evidence from Denmark" · The Quarterly Journal of Economics 129(3): 1141-1219how little of a retirement-savings tax subsidy becomes new saving when the saver has to take an action to receive itLast verified: 2026-09-07
- Poterba, J. M., Venti, S. F. & Wise, D. A. (1996), "Personal Retirement Saving Programs and Asset Accumulation: Reconciling the Evidence" · NBER Working Paper 5599 (1996)how much of what goes into a tax-advantaged retirement account is new saving rather than money moved from somewhere elseLast verified: 2026-09-07
Calculator unit tests · the assertions this page's worked example is checked against, and their last result
Changelog
- 2026-06-21 — initial publish (new format)
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Jordan Reeves
Founder of Talk Through Wealth. A software engineer for over a decade before turning to retirement planning, Jordan built the projection engine after watching family members get fragmented, country-by-country advice that never reconciled. He writes about retirement the way the engine computes it: month-by-month, lifetime-long, and skeptical of any rule of thumb that hasn't been run through the math.