Definition
The SEP-IRA and solo 401(k) are two retirement plans for self-employed individuals, each with different contribution mechanics and flexibility.
How It Works
A SEP-IRA allows employer contributions up to a percentage of compensation. A solo 401(k) combines an employee deferral with an employer contribution, which often allows larger total contributions at moderate income levels, and may permit Roth contributions and loans. Both are for owners with no full-time employees besides a spouse.
Example
A self-employed consultant at a moderate income contributes more through a solo 401(k) than a SEP because of the added employee deferral.
When It Works Best
The solo 401(k) often wins at moderate income or when Roth contributions are wanted, while the SEP is simpler.
Who It Applies To
Self-employed individuals without non-spouse employees.
Watch-Outs
A SEP balance can complicate a backdoor Roth through the pro-rata rule, while a solo 401(k) avoids that issue, which can tip the choice for high earners.
