Using a SEP or Solo 401(k) to Supercharge Retirement Savings

For self-employed professionals and small business owners, saving for retirement requires a different strategy than for traditional employees. Without access to a company-sponsored plan, you need tools that allow you to maximize contributions, minimize taxes and build long-term wealth. Two of the most powerful options are the SEP IRA and the Solo 401(k). Each has unique benefits, but both can help you accelerate your retirement savings.

SEP IRA: Simplicity and High Contribution Limits

A Simplified Employee Pension (SEP) IRA is often favored for its ease of setup and administration. Contributions are made by the employer—which, if you’re self-employed, means you. You can contribute up to 25% of your net earnings from self-employment, with a maximum of $70,000 in 2025—with a $72,000 limit projected for 2026.

For solo entrepreneurs or those with a few employees, a SEP IRA provides:

• Tax deductions: Contributions are deductible as a business expense, reducing your taxable income.
• Flexibility: Contributions are discretionary. You can adjust year to year based on cash flow.
• Simplicity: Setup and maintenance are straightforward, with minimal reporting requirements.

However, if you have employees, you must contribute the same percentage of pay for them as you do for yourself. This can significantly increase costs.

Solo 401(k): Maximum Flexibility for the Self-Employed

A Solo 401(k), also called an individual 401(k), is designed specifically for business owners with no employees (other than a spouse). It allows you to contribute in two ways:

1. Employee contributions: Up to $23,000 in 2024 (or $30,500 if you’re age 50+).
2. Employer contributions: Up to 25% of your compensation.

Combined, this can reach the same $69,000 annual limit (or $76,500 with catch-up contributions).

Advantages of the Solo 401(k) include:

• Higher contributions at lower income levels: Because you can make employee contributions, you can often reach the maximum faster than with a SEP.
• Roth option: Many providers allow Roth contributions, giving you the ability to grow tax-free retirement income.
• Loan provisions: Unlike a SEP, a Solo 401(k) may allow you to borrow against your balance.

The trade-off is that Solo 401(k)s require more administration, including filing Form 5500 once assets exceed $250,000.

Which Is Right for You?

If simplicity is your priority and you’re comfortable making contributions as profits allow, a SEP IRA may fit best. If you want to maximize contributions, have variable income or like the idea of a Roth option, the Solo 401(k) is often more powerful.

For self-employed individuals, both the SEP IRA and Solo 401(k) are excellent vehicles to supercharge retirement savings while minimizing taxes. The right choice depends on your income, business structure and long-term goals. A financial advisor can help you compare scenarios and implement the plan that best supports your vision for retirement.

For help with all your retirement planning and wealth management needs as an entrepreneur, contact Illumination Wealth today.