For self-employed individuals and small business owners, planning for retirement can be daunting. Without access to traditional employer-sponsored plans, the burden falls squarely on your shoulders to secure your financial future. Thankfully, two powerful retirement vehicles—Solo 401(k) and SEP IRA—can help.
But which one is right for you in 2025? Let’s explore their key features, contribution limits, tax advantages, and setup requirements to determine the best choice for your self-employed situation.
What Is a Solo 401(k)?
A Solo 401(k), also known as an individual 401(k), is a retirement savings plan specifically designed for self-employed individuals with no full-time employees other than their spouse.
Key Features:
- Allows contributions as both employer and employee
- Offers both traditional (pre-tax) and Roth (after-tax) options
- Available to sole proprietors, partnerships, LLCs, and corporations
- Option to borrow from the plan (loan provision)
2025 Contribution Limits:
- Employee deferral: Up to $23,000 ($30,500 if age 50+)
- Employer contribution: Up to 25% of net earnings
- Total max: $69,000 (or $76,500 if age 50+)
Tax Benefits:
- Traditional Solo 401(k): Reduces taxable income today
- Roth Solo 401(k): Tax-free withdrawals in retirement
For more on retirement tax advantages, check out our Roth IRA Retirement USA 2045 guide.
What Is a SEP IRA?
A Simplified Employee Pension (SEP) IRA is a tax-deferred retirement plan that allows self-employed individuals or small business owners to make employer-only contributions.
Key Features:
- Easy to set up and maintain
- Only employer contributes; no Roth option
- Ideal for businesses with few or no employees
2025 Contribution Limits:
- Up to 25% of compensation, capped at $69,000
Tax Benefits:
- Contributions are tax-deductible
- Investments grow tax-deferred until retirement
Explore other investing options for beginners to complement your SEP IRA.
Solo 401(k) vs SEP IRA: Head-to-Head Comparison
| Feature | Solo 401(k) | SEP IRA |
|---|---|---|
| Contributions | Employee + Employer | Employer only |
| Max Contribution (2025) | $69,000 ($76,500 age 50+) | $69,000 |
| Roth Option | Yes | No |
| Loan Option | Yes | No |
| Employees Allowed | No (except spouse) | Yes (must contribute equally) |
| Setup Complexity | Moderate | Very Simple |
| Admin Filing | Form 5500 if assets > $250K | None required |
Key Differences Explained
1. Contribution Flexibility
Solo 401(k)s allow higher contributions at lower income levels due to employee deferral. SEP IRAs rely solely on employer contributions.
2. Roth Option
Solo 401(k)s offer a Roth feature. SEP IRAs do not. This makes Solo 401(k)s attractive for those seeking tax-free growth.
3. Loan Option
Solo 401(k) allows you to borrow up to 50% of your account value (up to $50,000). SEP IRAs don’t allow loans.
4. Ease of Use
SEP IRAs are much simpler to set up, making them ideal for those who want a plug-and-play plan with minimal paperwork.
For more tax-efficient strategies, read our guide on How to Retire with $1M by 50 in the USA.
Which Plan Is Better for You in 2025?
Choose Solo 401(k) If:
- You earn under $250,000 and want to maximize contributions
- You want Roth tax benefits
- You may want to borrow from your retirement account
- You have no employees (except your spouse)
Choose SEP IRA If:
- You want a simple, low-maintenance plan
- You have employees (must contribute same % for all)
- You don’t need Roth or loan features
Real-Life Scenarios
1. Freelancer earning $90,000/year:
Solo 401(k) allows for higher contributions due to employee + employer split. Ideal choice.
2. Small business owner with 3 employees:
A SEP IRA may be easier and legally simpler if you want to contribute equally to all.
3. Side hustler with inconsistent income:
Solo 401(k) offers flexibility and Roth option for long-term growth.
For ideas on how to grow your income, read Passive Income with $500 in 2025.
How to Open a Solo 401(k) or SEP IRA in 2025
Best Brokerages:
- Fidelity – Great for both SEP and Solo 401(k)
- Vanguard – Low fees, excellent for long-term investors
- Charles Schwab – Full-featured with strong support
- E*TRADE – Best for Solo 401(k) with Roth and loan options
Setup Requirements:
- Business EIN (Employer Identification Number)
- Adoption agreement and plan documents (Solo 401(k))
- Application and funding for SEP IRA
Deadlines:
- SEP IRA: Open and contribute by tax-filing deadline (including extension)
- Solo 401(k): Must be established by Dec 31, 2025 to contribute for 2025
Need help budgeting for your retirement goals? See our post on How to Budget Your Money in 2025.
Tax Strategies Using Solo 401(k) and SEP IRA
- Reduce taxable income significantly with pre-tax contributions
- Use Roth Solo 401(k) for tax-free growth
- Combine with a Traditional or Roth IRA for diversification
- Backdoor Roth conversion possible with Solo 401(k)
To learn more about tax-advantaged investing, check out Index Funds vs ETFs for 2025.
Pros and Cons Summary
Solo 401(k):
✅ Higher contributions at lower income
✅ Roth option
✅ Loans available
❌ Requires more setup and admin
SEP IRA:
✅ Super easy to set up
✅ High employer contributions
❌ No Roth or loan feature
❌ Must contribute same % for all employees
Final Verdict: What’s Best for Self-Employed in 2025?
If you’re a solo entrepreneur or freelancer with no employees, the Solo 401(k) wins hands down. It offers more flexibility, higher contribution potential, Roth savings, and even borrowing ability.
If you want simplicity or you have multiple employees, the SEP IRA is a more streamlined and legally safe route.
Either way, choosing one of these plans in 2025 puts you ahead of the curve in securing your retirement. Don’t wait—your future self will thank you.
Resources & Tools
- Roth IRA Retirement USA 2045
- Retire with $1M by 50 USA
- How to Start Investing with $100
- Passive Income with $500 in 2025
- Index Funds vs ETFs 2025
- How to Budget Your Money in 2025
- Investing for Beginners
Which plan will you choose to build your retirement wealth in 2025? Let us know in the comments!