Two retirement plan options for employees of small businesses are the simplified employee pension (SEP) IRA and the solo 401(k)— both of which are tax-deferred plans. With a SEP IRA, individuals can contribute up to 25% of their income to the account, while solo 401(k)s allow individuals to save up to 100% of their compensation as an employee contribution up to a certain limit, along with contributions of up to 25% of their compensation.

Let's take a look at how these two plans work to make choosing a little easier.

Should I Choose a SEP IRA or a Solo 401(k)?

The retirement account꧟ option you choose depends on the circumstances. Those who have full-time employeꦏes can save for retirement using a SEP IRA, while solo practitioners can opt for a solo 401(k) that has higher contribution limits and other advantages. Note that it is possible not to choose at all: You can have both plans simultaneously.

Now, let's take a look at how each of these plans works to help make deciding between them easier.

SEP IRA

The 澳洲幸运5官方开奖结果体彩网:simplified employee pension IRA is the simplest way for business owners to help their employees save for retirement. The plan is purely 澳洲幸运5官方开奖结果体彩网:profit-sharing in nature, which means only the employer can make contributions for their employees and themselves. A SEP IRA can be established anytime before “the due date (including extensions) of your business income tax return for the year you want to establish the plan.”

An owner can make annual contributions of:

• Up to 25% of business revenue (20% for a 澳洲幸运5官方开奖结果体彩网:sole proprietorship or single-member 澳洲幸运5官方开奖结果体彩网:limited liability corporation (🧸LLC)) or up to $70,000 in 2025 (up from $69,000 in 2024) to their own account—whichever is less.
  
• The lesser of the dollar limit or 25% of the employee’s total compensation to an employee’s SEP IRA

One of the main advantages of a SEP is its relative simplicity compared with the rigorous reporting requirements that come with 澳洲幸运5官方开奖结果体彩网:qualified retirement plans, even those that are designed for 澳洲幸运5官方开奖结果体彩网:self-employed persons, such as 澳洲幸运5官方开奖结果体彩网:Keogh plans.

Solo 401(k)

A solo 401(k) is designed exclusively for sole proprietorships with only one employee: the owner. Also known as an individual 401(k), a one-participant 401(k), or a uni-k, it can also be established retroactively, “provided it’s adopted by the due date, including extensions, for filing the employer’s tax return for the taxable year of adoption, and the employer elects to treat the plan as having been adopted as of the last day of that prior taxable year.”

This retirement vehicle is generally considered a better option t🧸han a SEP IRA for solo practitioners because it offers the following additional features:

• Employee deferrals: Unlike a SEP IRA, a solo 401(k) allows employer and employee contributions. This allows the proprietor to contribute up to $23,500 in 2025 ($23,000 in 2024) even if the business loses money.
• Catch-up contributions: A solo 401(k) allows the same annual amount to be contributed by the owner as a SEP does ($70,000 in 2025 and $69,000 in 2024), but it also allows participants 50 and over to contribute an additional $7,500 as a 澳洲幸运5官方开奖结果体彩网:catch-up contribution.
• Roth contributions: A solo 401(k) allows post-tax Roth contributions, which can let the owner accumulate a substantial pool of tax-free money over time. A SEP IRA only allows traditional pretax contributions.
• Loan provision: A solo 401(k) can allow participants to take out a loan equal to the lesser of 50% of the plan balance or $50,000. Loans are not available from a SEP IRA.
  

Key Differences

The chart below highlights some of the key differences between the SEP IRA and solo 401(k). Remember that both can be established at any time before tax returns are filed, but the repo♏rting requirements are very differen𝐆t.

SEP IRAs are simpler and don't require complicated paperwork or annual reporting. Contributions are reported on Form 5498. But, it gets a little more complicated for solo 401(k)s as administrators must report annually to the IRS using Form 5500-EZ.

The Bottom Line

A SEP IRA and a solo 401(k) are each good retirement plans for business owners. Depending on the type of business you have and your retirement goals, one may be a better option than the other. The 澳洲幸运5官方开奖结果体彩网:Internal Revenue Service (IRS) has various publications you can read to determine which will be the best for you and your business. You may also want to 澳洲幸运5官方开奖结果体彩网:seek guidance from a financial ad༒visor.