Solo 401(k) vs. SEP-IRA for the Self-Employed: Which Saves More in Taxes?

How Contribution Limits Actually Compare

The numbers at $100,000 net self-employment income (after SE tax deduction):

SEP-IRA: 25% of net SE income = approximately $18,587 (after the SE deduction adjustment). Maximum contribution at this income level.

Solo 401(k): Employee elective deferral up to $23,500 (2025) + employer profit-sharing up to 25% of net SE income ($18,587 at $100K SE income) = $42,087 total. Catch-up at age 50+ adds another $7,500 employee contribution.

At $100,000 in net SE income, a Solo 401(k) allows $42,087 in contributions versus $18,587 for a SEP-IRA — a $23,500 difference, entirely from the employee elective deferral that SEP-IRA lacks.

SEP-IRA reaches the Solo 401(k) total contribution limit at approximately $220,000+ in SE income, where both max at $69,000.

Roth Option and Other Differences

Solo 401(k) plans can offer a Roth employee contribution option. This allows self-employed individuals in the Roth conversion window (or those expecting higher future tax rates) to make after-tax contributions that grow tax-free.

SEP-IRA does not have a Roth option — all contributions are traditional (pre-tax). While a SEP-IRA can be converted to Roth via a traditional Roth conversion, the mechanics are different.

Administrative differences: - SEP-IRA: simple to establish, minimal paperwork, no annual reporting requirement - Solo 401(k): more complex to establish, requires a plan document, annual Form 5500-EZ filing when account assets exceed $250,000

For self-employed individuals with employees (other than a spouse), a Solo 401(k) cannot be used — SEP-IRA or a SIMPLE IRA are the options.