Introduction

If you are a small business owner or self-employed, you may be looking for tax-advantaged ways to save for retirement above and beyond the contribution limits of IRAs. The maximum contribution limit in 2025 for a Traditional IRA and Roth IRA is $7,000 ($8,000 for individuals 50 and older). Complimenting your IRA with a SEP IRA or Solo 401(k) can be an excellent solution to saving more for retirement. This article will briefly explain each option and provide insight into the similarities and differences between a SEP IRA and Solo 401(k).

Overview of a SEP IRA

A SEP IRA stands for Simplified Employee Pension Individual Retirement Account. This type of account allows employers to contribute to their personal and employee retirement accounts. A business of any size can establish a SEP IRA, even someone self-employed. A SEP IRA is easy to set up and maintain and allows additional tax-advantaged retirement savings beyond a Traditional or Roth IRA. There are specific eligibility requirements for individuals to participate in a SEP plan. The individual must be at least 21. They must have worked for the employer in at least 3 of the last 5 years and received at least $750 in compensation for 2023 and 2024.

Contributions to a SEP IRA are made by the employer. Employees cannot contribute to their own SEP IRA. The employer can contribute up to 25% of the business’s income into a SEP IRA up to the maximum of $70,000 in 2025. Unlike Traditional IRAs, Roth IRAs, and 401(k)s, SEP IRAs do not have catch-up contributions for individuals over 50. Employers with more than one employee must contribute the same amount to each employee equally. If the employer contributes 5% to their SEP IRA, they must also contribute 5% to each eligible employee's SEP IRAs.

SEP IRA contributions are tax deductible for the employer and provide tax-deferred growth for the employee. SEP IRAs also allow the employee to invest in a broader range of investments than some other employer-sponsored plans. You can withdraw money from the SEP IRA at any time. However, distributions before the age of 59 ½ may result in an additional 10% tax penalty unless you qualify for an exception to the tax. All distributions in a SEP IRA are taxed as regular income and count as income in the year the distribution was taken. Required Minimum Distributions (RMD) also apply to SEP IRAs. The individual will be required to take an RMD each year when they reach age 73 (or 75 if born in 1960 or later). The IRS Rules of SEP IRAs prohibit participants from taking out loans, and assets in the SEP IRA may not be used as collateral.

A SEP IRA is relatively easy to set up and requires minimal effort to maintain. Setup and maintenance also come with minimal cost. There are three steps to setting up a SEP plan. There must be a written agreement providing benefits to eligible employees. The plan participants must be given information about the plan, and a SEP IRA must be set up for each eligible employee. Taking advantage of a financial professional’s services will make setting up a SEP IRA simple and correct.

Overview of a Solo 401(k)

A Solo 401(k) is for self-employed individuals with no employees other than the business owner (and potentially a spouse). A Solo 401(k) is often called a Self-Employed 401(k), Individual 401(k), or One-Participant 401(k). A Solo 401(k) is very similar to a regular 401(k) with multiple employees in the plan, but the business owner in a Solo 401(k) acts as the employer and the employee. The business owner also is not subject to nondiscrimination testing because there are no other employees in the business. A Solo 401(k) allows a business owner to save more tax-deferred (or tax-free in a Roth Solo 401(k)) funds than they could in a Traditional IRA or Roth IRA.

Contribution limits in a Solo 401(k) are like those of a regular 401(k), but the business owner can also give a nonelective contribution as the employer. The total contribution limit in a Solo 401(k) for 2025 can be up to $70,000 for individuals under 50, $77,000 for individuals between 50 to 59 or over 64, and new for 2025 is the super catch-up contribution where individuals from 60 to 63 can have total contributions up to $81,250. Keep in mind that this is just the maximum allowed for total contributions. In 2025, a participant in a Solo 401(k) can make elective deferrals as the employee up to $23,500 under 50, a $7,500 catch-up contribution between 50 to 59 and over 64, and the super catch-up contribution of $11,250 for participants ages 60 to 63. The business owner can also make a nonelective contribution of up to 25% of compensation as defined in the plan.

For example, Jake, age 34, owns a consulting firm and is the only employee and the owner. Jake earns $200,000 in 2025 from his W-2 wages. He contributes $23,500 as an employee and wants to contribute 25% of his compensation as the employer, which would be $50,000. But he cannot do that because he would exceed the $70,000 2025 maximum (he would be over by $3,500), so his maximum contributions are capped at $70,000. Nick, age 35, on the other hand, also has a small business and made $100,000 in 2025. He contributes $23,500 as the employee and can also contribute up to 25% of his earnings as the employer ($25,000). So, the maximum that Nick can contribute to his Solo 401(k) for 2025 is $46,500. Although this is well under the maximum of $70,000, Nick has reached the maximum allowable contributions as the employee and employer.

Setting up a Solo 401(k) is a relatively simple process. You need a tax identification number like an Employer Identification Number or Social Security Number. Choosing a plan administrator is the next step. This is basically selecting a custodian to hold your assets and administer the plan. At Whitaker-Myers Wealth Managers, we can help you set up your Solo 401(k) with Fidelity or Charles Schwab and manage and direct the investments within the plan. Next, you need to sign a plan adoption agreement and any other paperwork the provider requires. Once the account is set up, you will decide how you would like to contribute and choose your investments. One more note about Solo 401(k) plans is if your balance is over $250,000, you might have to file tax form 5500-EZ with your tax return.

Conclusion

A SEP IRA is generally easier to set up than a Solo 401(k). SEP IRAs are low maintenance and easy to manage. They are suitable for small business owners with variable income and little to no employees. Unlike a Solo 401(k), SEP IRAs do not have catch-up contributions available because the employer makes the contribution. A Solo 401(k) may require more effort to set up but allows individuals to potentially save more than they would be able to in a SEP IRA. The Solo 401(k) is ideal for small business owners with no employees (other than a spouse) looking to maximize contributions.

If you are looking to set up a SEP IRA or Solo 401(k), we suggest consulting with your financial advisor to determine which option is best for your particular situation.