SEP versus Solo 401

Small business owners here (husband and wife owned biz), planning a rollover of funds at the new year, and thinking of terminating our employer sponsored plan….debating between SEP and Solo 401. We know 401 had more options, but more reporting. And in order to reach max, $61,000, your payroll dollars are less.

What are we missing on the benefits/consideration of SEP? Or is it just better to go Solo 401 and know we need to do the Form 5500 each year?

Hi @MLCL812

I love this topic, thank you for asking about it! A couple things to note that you included in your question:

  • Form 5500 does not have to be filed until the solo 401(k) plan has over $250K in assets.
  • The investment options on both the Solo 401(k) and SEP IRA can be very broad. You can access any low cost index funds that you would like with either plan.

The solo 401k is significantly more complicated to setup and maintain. It can also be slightly more costly in terms of fees paid to service providers. The SEP IRA is very straight forward to set up and maintain.

SEP IRAs do not allow for Roth contributions. Solo 401(k)'s do. Not sure if you were planning to make Roth vs Traditional contributions, but keep in mind SEPs are only traditional.

The main advantage of a solo 401(k) over a SEP IRA is you can potentially contribute more to the solo 401(k) - this depends on your income. The SEP IRA is limited to the lesser of 25% of your income or $61K. With a solo 401(k) you can contribute 100% of your compensation up to $20,500 and then additionally make a sizable employer contribution as well (there are many rules to note here, but main takeaway is the solo 401k likely will allow you to contribute more each year).

If you have employees in your business, there are a number of other considerations.

I hope this helps! Please let us know if there are any other questions!



Thank you! Many of the considerations we are weighing. The other beauty of solo 401 is you can max out once you hit $162,000 in income, where SEP is $245,000 in income to max $61,000 contribution. So a little more bang for your buck if I correct on this math (which will change for 2023 when these limits increase to 66,000) But good to know the complications…that is a factor for sure!

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