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SEP vs. Solo 401(k)

These are the two retirement plans that allow self-employed individuals to defer the most income.  These two plans have many similarities and some key differences. 

The maximum contribution to an SEP for 2023 is $66,000, and for 2024 is $69,000.  The SEP is the easier of the two to set up and contribute to.  The total contribution can be made in one lump sum by the due date of your individual tax return, October 15^th with an extension.  Your maximum allowable contribution for any year needs to be computed with your tax return for that year. 

One advantage of the Solo 401(k) over the SEP is the ability to make “catch-up” contributions for those 50 years and older.  The maximum contribution to the Solo 401(k) is the same as the SEP before the catch-up contribution, $66,000 for 2023, and $69,000 for 2024.  The catch-up contribution allows an additional $7,500 contribution bringing the total for those aged 50 and over to $73,500 for 2023, and $76,500 for 2024.

There is a little more administration involved in the Solo 401(k).  The employee contribution (same as 401(k) contribution if you were working for another company) must be made before year-end.  The employer contribution will be made at the time your tax return is filed so final self-employment income for the year is calculated.

For taxpayers under age 50 and earning less than $345,000 in 2023, the Solo 401(k) can allow the individual to contribute significantly more than the SEP.  For an individual earning right around $345,000, the contribution limits for the two plans are the same.  For those above the age of 50, the Solo 401(k) allows the additional catch-up contribution of $7,500 and is therefore more beneficial. 

A major benefit of the SEP plan is the ability to contribute to both the SEP and an employer-sponsored 401(k) plan.  This comes into play if you are an employee of another company and have self-employed income on the side.  A highly compensated employee who also makes significant income on the side can effectively double the annual contribution limits of $66,000 for 2023 and $69,000 for 2024. 

The same is not true for the Solo 401(k).  Contributions to an employer sponsored plan reduce the ability to contribute to a Solo plan. 

A self-employed individual can have both a SEP plan and a Solo 401(k) plan open and decide each year which will be most advantageous to contribute to for that year.