(Solo 401K vs SEP-IRA: updated December 2025 JIT for the upcoming 2026 tax season)

Solo 401K vs SEP-IRA: What S Corporation Owners Should Know

As an S corporation owner, you wear many hats: CEO, marketing team, janitor, and chief financial officer. Therefore, retirement planning requires careful decisions. Let’s take a look at two popular options: the Solo 401K vs SEP-IRA – each offering unique benefits and tax implications.

Contribution Limits for Solo 401K vs SEP-IRA

Solo 401(k): You can contribute as an employee up to $23,500 in 2025, plus a $7,500 catch-up if over 50. Employer contributions can add up to 25% of W2 compensation. Total combined contributions may reach $70,000, or $77,500 with the catch-up. For ages 60–63, a super catch-up adds $3,750, for a total of $81,250. Note that S corporation income is not considered self-employment income for this plan.

SEP-IRA: This plan allows contributions up to 25% of W2 compensation per eligible employee, capped at $70,000 in 2025. Although simpler, contributions are generally lower compared to Solo 401(k).

Tax Advantages

Solo 401(k): Employee and employer contributions generally reduce taxable income immediately. Roth Solo 401(k)s allow only the employer portion as a pre-tax deduction. Meanwhile, all earnings grow tax-deferred until withdrawal.

SEP-IRA: Employer contributions are fully tax-deductible, lowering taxable income instantly. Employee contributions do not apply. Earnings grow tax-deferred, providing the same long-term advantage.

Flexibility

The Solo 401(k) offers greater flexibility. For instance, you can access loans, take hardship withdrawals, and choose from a wider range of investment options.

In contrast, SEP-IRAs are less flexible. Loans are typically unavailable, hardship withdrawals follow stricter rules, and investment options may be limited.

Administrative Ease for Solo 401K vs SEP-IRA

Solo 401(k)s require more paperwork, especially if loans are offered. You must establish the plan before the tax year ends, though contributions can be made by the filing deadline. Typically, this plan suits single-owner businesses, but spouses may also participate.

SEP-IRAs are simpler to set up and manage. You can establish the plan after year-end, with contributions due by the filing deadline. Multiple employees can participate without restriction.

Choosing the Right Option

Your choice depends on your individual circumstances. Consider these factors:

• Contribution Limits: Solo 401(k) may allow higher contributions for higher compensation.
• Simplicity: SEP-IRA is easier to set up, with lower administrative effort.
• Flexibility: Solo 401(k) offers loans and broader investment control.
• Employees: SEP-IRA may be necessary if you employ multiple staff members.

Additional Considerations for Solo 401K vs SEP-IRA

For S corporation owners under age 50, both the Solo 401(k) and SEP-IRA have a $70,000 maximum contribution limit. However, how you reach that limit differs significantly between the two plans.

With the Solo 401(k), you can contribute up to 100% of your employee compensation, but the employee contribution is capped at $23,500. The remainder of the $46,500 (to reach $70,000 total) comes from the employer contribution, which equals 25% of employee compensation. To fund the $70,000 contribution cost-effectively, your ideal W2 compensation would need to be about $186,000.

Keep in mind that higher W2 compensation increases payroll taxes, including FICA and Medicare. As an owner-employee, you are responsible for paying both employee and employer payroll taxes. Therefore, avoid raising W2 compensation unnecessarily just to reach the maximum contribution.

For the SEP-IRA, reaching the $70,000 maximum requires W2 compensation of roughly $280,000. This comparison clearly shows that the Solo 401(k) often provides higher contributions at lower compensation levels.

Conclusion

This overview highlights key differences between the Solo 401(k) and SEP-IRA. Consulting a tax professional is crucial to optimize retirement savings and tax benefits. Don’t let the complexities of 401(k)s and IRAs prevent you from planning for your future. For a 30-minute complimentary tax consultation contact Sanz Virtual Enterprise, LLC today. Let us help you optimize retirement planning and maximize your tax strategies as a business owner.

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