Business owners have a number of options to save toward retirement, and many opt for a Simplified Employee Pension Individual Retirement Account (SEP IRA). However, a Solo 401(k) can often maximize savings and offer greater tax advantages than a SEP IRA.
If you’re a business owner with no full-time employees (other than your spouse), consider these benefits of a Solo 401(k):
- Save more at lower incomes. SEP IRAs limit retirement contributions to 25% of your net business income. With Solo 401(k)s, your contributions as an ‘employee’ don’t count toward the 25% ‘employer’ contribution and can extend up to the annual limit established by the IRS as well as receive an additional employer profit-sharing contribution.
For example, an S-Corporation business owner with $100,000 in net business income could contribute $25,000 (25%) toward a SEP IRA. However, using a Solo 401(k) structure, that contribution could nearly double—by deferring $23,500 (the 2025 limit) and receiving 25% profit sharing for a total contribution of $48,500!
- Multiple contribution methods. SEP IRAs only allow for contributions from the employer. But as a business owner and employee, you function as both. Solo 401(k)s allow you to stack both types of contributions, which affords more flexibility in the income you classify as personal versus business and tax-saving strategies that accompany those decisions.
- Greater potential for tax-free growth. Both Solo 401(k)s and SEP IRAs now offer a Roth option to deliver tax-free growth in retirement. However, the employer-only contributions of a SEP IRA mean the company misses out on tax deductions otherwise available with the profit-sharing contributions of a solo 401(k).
- More control. SEP IRAs tend to be more limited in plan design, but Solo 401(k)s can include features such as automatic enrollment, profit-sharing, vesting, and loan provisions.
- Consistency & dollar-cost averaging. Solo 401(k)s deduct a fixed amount from each paycheck, which enables disciplined investing despite market ups and downs. Automatic contributions reduce the risk of trying to ‘time the market’—panic-selling when the market drops or over-investing in a (temporarily) high-performing sector. Using a Solo 401(k), you automatically buy more shares with your fixed contribution when prices are low, which can decrease your average cost per share over time.
If your income fluctuates, you want flexible, high-contribution potential, and advanced tax planning opportunities, a Solo 401(k) might be a better route for your retirement resources.
Contact us today to run an income projection comparing Solo 401(k) and SEP IRA approaches.
For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Cetera Wealth Services, LLC nor any of its representatives may give legal or tax advice.
Dollar-cost averaging will not guarantee a profit or protect you from loss, but may reduce your average cost per share in a fluctuating market.