fbpx
Advertiser disclosure

Terms and Restrictions Apply
Physician on FIRE has partnered with CardRatings and other partners for our coverage of credit card products. Physician on FIRE and CardRatings may receive a commission from card issuers. Some or all of the card offers that appear on the website are from advertisers. Compensation may impact on how and where card products appear on the site. POF does not include all card companies or all available card offers. Credit Card Providers determine the underwriting criteria necessary for approval, you should review each Provider’s terms and conditions to determine which card works for you and your personal financial situation.
Editorial Disclosure: Opinions, reviews, analyses & recommendations are the author’s alone, and have not been reviewed, endorsed, or approved by any of these entities.

The 7 Advantages of a Solo 401(k) Over a SEP IRA

Author Alvin Yam
folder on the desk

When it comes to retirement plans for self-employed physicians or those with side gigs, two popular options are the SEP-IRA and the Solo 401(k). We discussed these two plans in a previous article “Should You Invest in a SEP IRA or Solo 401(k)? Everything You Need to Know”

and looked at the pros and cons of each.

Though both the Solo 401(k) and SEP IRA come with its benefits, there are some compelling reasons why the Solo 401(k) is more compelling than the SEP IRA.

How the SEP-IRA and the Solo 401(k) Work

The SEP IRA, which stands for Simplified Employee Pension Individual Retirement Account, is designed for self-employed individuals and small business owners and can accommodate employees. This type of plan is pretty straightforward and allows contributions based on a percentage of income with no employee contributions.

The Solo 401(k), which is sometimes referred to as an Individual 401(k), is a retirement plan for self-employed individuals or business owners with no employees other than a spouse. It mimics the 401(k) plans offered by larger employers but offers higher contribution limits.

SEP IRA Contribution Limits for 2025

For 2025, the maximum contribution to a SEP IRA is: $70,000 or 25% of your compensation, whichever is less.

As a self-employed individual, this calculation involves a bit of math where you’ll need to consider your net earnings from self-employment after deducting half of your self-employment tax and your own SEP-IRA contributions.

With a SEP IRA, contributions are employer-only, meaning you can’t make personal contributions as an employee. This is an important point if you’re looking to maximize your savings through both employee and employer contributions such as a Solo 401(k).

SEP IRA contributions can be made until your tax filing deadline, including extensions, which offers flexibility if you’re unsure about your income for the year until after the tax year ends.

Incrowd_surveys

Physicians and pharmacists, Register with Incrowd for the opportunity to earn easy money with quick "microsurveys" tailored to your specialty.

Also, the compensation used to calculate the SEP contributions cannot exceed $350,000. This means that even if your earnings are higher than this amount, only $350,000 will be considered when calculating the maximum allowable contribution to your SEP IRA.

Solo 401(k) Contribution Limits for 2025

A Solo 401(k) plan is designed with flexibility in mind, and allows for dual contribution capacities to help boost your retirement savings:

Employee Contribution

For 2025, you can contribute as an employee up to $23,500 of your compensation or 100% of your compensation if that is less. This is your elective deferral, which you can decide to make either as a traditional pre-tax contribution or as a Roth after-tax contribution.

Employer Contribution

As the employer, you can contribute up to 25% of your net self-employment income. This is calculated after deducting half of the self-employment tax and any plan contributions made as the employee.

Catch-Up Contributions

If you are 50 or older, you have the option to add an additional catch-up contribution of $7,500, increasing your maximum employee contribution to $31,000 for the year.

For those aged 60 to 63, thanks to the SECURE 2.0 Act, the catch-up contribution is raised to $11,250, allowing for a total employee contribution of $34,750.

Total Contribution Limit

For 2025, the sum of your employee and employer contributions cannot exceed $70,000. This combined limit includes all contributions made by you as the employee and the employer contributions based on your net earnings from self-employment.

These contribution limits are subject to annual adjustments by the IRS. Each year, the IRS evaluates economic conditions and adjusts these limits to maintain the purchasing power of retirement savings. For instance, the increase from $69,000 in 2024 to $70,000 in 2025 for the total contribution limit.

Retirement Plan Employee Contribution Employer Contribution Total Contribution Limit (Under 50) Total Contribution with Catch-Up (50+)
SEP IRA N/A Up to 25% of compensation $70,000 N/A
Solo 401(k) $23,500 Up to 25% of compensation $70,000 $77,500

Rules and Flexibility

With a SEP IRA, contributions are employer only; you can’t make personal contributions as an employee. This limits your ability to maximize savings through employee and employer contributions like in a Solo 401(k).

With a Solo 401(k), Roth contributions are allowed, which can be beneficial if you anticipate being in a higher tax bracket during retirement. While changes introduced by the SECURE Act 2.0 now permit Roth contributions in SEP IRAs, this option is still less common.

Only Solo 401(k) plans allow loans from the plan, which is up to 50% of your account balance or $50,000, whichever is less. This feature can come in handy when you need liquidity without early withdrawal penalties.

When it comes to business planning, if you plan to hire employees in the future, a SEP IRA is better suited compared to a Solo 401(k) as the plan allows you to add employees. In comparison, a Solo 401(k) doesn’t allow for employees other than a spousal employee.

Administration and Compliance

SEP IRAs are easy to set up and maintain, and there’s no annual filing required with the IRS, which can be a relief for busy physicians who don’t want additional administrative tasks.

A Solo 401(k) is relatively straightforward for self-employed individuals. However, once your plan assets exceed $250,000, you must file Form 5500 with the IRS annually. This adds a layer of complexity and paperwork, but for the benefits it provides, it can be a worthwhile trade-off.

7 Key Advantages of a Solo 401(k)

1. Higher Contribution Limits

A Solo 401(k) allows for higher allowable contributions compared to a SEP IRA.

To max out contributions to a Solo 401(k) in 2025, assuming you’re under 50, you would need around $220,000 in net business income.

This is because you contribute $23,500 as an employee and then 25% of your net earnings after accounting for the employee contribution and self-employment tax, to roughly align with this income level to reach the $70,000 limit.

For a SEP IRA, to reach the maximum contribution of $70,000 for 2025, you would need a net self-employment income of about $350,000.

This is because the contribution is solely from the employer side, and after accounting for the self-employment tax, you’re effectively contributing around 20% of your net income to reach the cap.

This difference in how contributions are calculated and the dual contribution structure in Solo 401(k)s make it more advantageous for those not earning at the highest levels to save more for retirement with less income than required for a SEP IRA.

2. Backdoor Roth IRAs

If you’re interested in tax diversification through Roth conversions, a Solo 401(k) provides a cleaner path to execute backdoor Roth IRA strategies. This is because Solo 401(k)s are not subject to the pro-rata rule when converting to Roth, which simplifies backdoor Roth strategies. After Secure Act 2.0, SEP IRAs have gotten some relief, though the Solo 401(k)s maintain an edge in this area.

3. Traditional vs. Roth Options

The Solo 401(k) has a major advantage with its ability to accept both traditional pre-tax and Roth post-tax contributions. This feature gives you a lot more flexibility based on your current tax situation and expectations for future income.

  • Traditional Solo 401(k): This option allows for contributions with pre-tax dollars. By contributing earnings before they are taxed, you effectively reduce your taxable income for the year, which gives you immediate tax savings.
  • Roth Solo 401(k): With this option, contributions are made with after-tax dollars. While this doesn’t reduce your taxable income for the year, it can be a significant benefit down the road after these funds have been invested and compounded for years.

Qualified withdrawals in retirement, including earnings, are completely tax-free, as long as certain conditions are met (like the account being open for at least five years and the withdrawals occurring after age 59½). This can be a substantial advantage for those who expect their tax rates to rise or anticipate being in a higher or similar tax bracket in retirement.

For SEP IRAs, the Roth option was introduced by SECURE Act 2.0, enacted in late 2022, and introduced the ability for employers to offer Roth contributions in SEP IRAs starting in 2023.

However, this option is still less common and may not be available with all providers. That’s because not all providers have updated their systems or decided to offer this option. Some custodians have chosen not to offer this feature, possibly due to administrative complexities.

4. Loans and Distributions

A notable feature of the Solo 401(k) is its provision for loans, which is not available with a SEP IRA.

With a Solo 401(k), you’re allowed to borrow up to 50% of your vested account balance or $50,000, whichever is smaller. This capability can be a lifesaver in emergencies, offering access to funds without the immediate tax implications or penalties that come with withdrawals from other retirement accounts.

SEP IRAs do not offer any loan provisions. Withdrawing funds before age 59½ typically incurs not only income tax but also a 10% early withdrawal penalty, unless specific exceptions apply.

Life is unpredictable, and there might come a time when you need to tap into your retirement savings for unforeseen expenses.

Solo 401(k) plans cater to this by allowing you to borrow from your account, giving you access to your money in a more tax-efficient manner compared to a straight withdrawal.

Also, the distribution rules for a Solo 401(k) are more accommodating; you can begin taking penalty-free distributions at age 59½, or even earlier if you meet certain conditions, such as leaving your business.

5. Catch-Up Contributions

As we approach retirement age, maximizing retirement savings becomes more important. Catch-up contributions are designed to help those who might have started saving later in life or who wish to boost their nest egg as they near the end of their working years.

With the Solo 401(k), if you’re 50 or older, the Solo 401(k) plan allows for an additional $7,500 in catch-up contributions each year, on top of the standard employee contribution limit. This provision recognizes that older individuals might need to save more aggressively to catch up on their retirement goals.

For the age group of 60 to 63, the catch-up contribution limit is significantly increased to $11,250. This special provision, introduced by the SECURE Act 2.0, aims to allow those in their peak earning years just before retirement to supercharge their savings.

In comparison, the SEP IRA has no catch-up option, which can be a major drawback for older individuals, especially those in higher income brackets or those who haven’t been able to save as much earlier in their careers.

6. Tax Deductions from Both Business and Personal Taxes

When you make employee contributions to your Solo 401(k), these are deducted from your taxable income on your personal tax return. This effectively lowers your adjusted gross income (AGI), potentially reducing your overall tax liability for the year.

Also, contributions made to a Solo 401(k) can be deducted in two ways. Employee contributions reduce your taxable income on your personal return, while employer contributions can be deducted as business expenses if you operate as an S Corporation or LLC.

With a SEP IRA, all contributions are made by the employer, which, in the case of self-employed individuals, is you. This means you can only deduct contributions from your business income on your business tax return.

There’s no option to reduce your personal taxable income directly through employee contributions since SEP IRAs don’t allow for personal contributions in the same way Solo 401(k)s do.

7. Simplicity and More Flexibility for Solo Operators

For self-employed individuals and small business owners, such as physicians operating solo or with minimal staff, the Solo 401(k) gives you flexibility in term of administration.

Since you are the sole participant (though you can include your spouse), you have complete control over:

  • Contribution Adjustments: You can alter your contributions annually or even within the year based on your financial situation without needing to consult or coordinate with other employees.
  • Plan Amendments: If your business changes or your personal circumstances evolve, you can amend the plan to suit new goals or strategies. This might include changing investment options, altering contribution percentages, or switching between Traditional and Roth contributions if your plan allows both.
  • Decision Making: Without other participants, decisions about plan loans, withdrawals, or investment choices are solely yours to make.

As your practice evolves, you may decide to hire employees. Transitioning from a Solo 401(k) to a standard 401(k) plan is typically seamless with most providers, which lets you retain accumulated benefits.

The Solo 401(k) and SEP IRA have administrative obligations, but the Solo 401(k) generally requires less ongoing compliance. You must file Form 5500 with the IRS annually only if your plan assets exceed $250,000.

This filing is manageable for many solo operators, especially weighed against the potential benefits of higher contribution limits and the potential for higher retirement savings.

Aspect SEP IRA Solo 401(k)
Contribution Limits – Up to $70,000 or 25% of compensation, whichever is less

– Compensation cap at $350,000

– Total limit of $70,000 (under 50); $77,500 (50+ with catch-up)

– Employee: $23,500 + catch-up ($7,500 or $11,250 for ages 60-63)

– Employer: 25% of compensation

Employee Contributions – None (employer-only contributions) – Yes, up to $23,500 for 2025, plus catch-up contributions
Roth Contributions – Not commonly available; introduced by SECURE Act 2.0 but still less common – Available for employee contributions
Loans – Not permitted – Allowed, up to $50,000 or 50% of account balance, whichever is less
Catch-Up Contributions – None – $7,500 for those 50+, $11,250 for ages 60-63
Administrative Ease – Easy to set up, no annual filing required – More complex with Form 5500 filing required if assets exceed $250,000
Flexibility – Less flexible; only employer contributions – High flexibility with both employee and employer contributions, Roth option, loans
Future Employees – Easier to include employees – Designed for solo practitioners; can convert to other plans if hiring staff in the future
Tax Benefits – Deductible as business expense – Deductible on both personal and business taxes

Other Considerations

Before deciding on which retirement plan to go with, one question to first ask is, “do you have any plans to hire an employee, even in the future?” If the answer leans towards “maybe,” most experts will advise leaning towards a SEP IRA because this plan can be used to fund employee retirements.

Hiring just one employee for your business in the future (other than your spouse) would eliminate the Solo 401(k) as an option. Switching from a Solo 401(k) to an SEP IRA at some future date can be a significant hassle.

As a business owner, choosing an SEP IRA owing to potential future hires has another important consideration: all employee contributions must be the same percentage of compensation.

For instance, as a business owner who wants to put 10% of your net income into your SEP IRA, you will also need to contribute 10% of each employee’s pay into their SEP IRA.

For self-employed physicians who don’t have additional employment (where you can contribute to a 401k as an employee), a Solo 401(k) is likely to be the better choice. This plan can exceed what’s possible with a SEP IRA for the same income level due to the way contributions are calculated.

Also, the Solo 401(k) plan can support the backdoor Roth IRA strategy without the complications of the Pro Rata rule, which can be an advantage when it comes to tax planning.

Lastly, only with a Solo 401(k) plan can you leverage the Mega Backdoor Roth strategy, where you convert after-tax contributions into a Roth, in order to maximize your tax-free growth potential.

Final Thoughts

For those who are self-employed with no employees, and looking to maximize their retirement savings while enjoying flexibility and control over their investments, the Solo 401(k) stands out as the better plan.

In my view, the Solo 401(k) with the Roth option could be a gamechanger for some, especially for those focused on maximizing their retirement savings while also having a Roth backdoor conversion option.

But if you’re a physician with side gigs or locum tenens work and your main job involves a W-2 where you’re already contributing to another 401(k), then a Solo 401(k) might be less appealing due to the overall cap on contributions across all 401(k)s.

In this scenario, the SEP IRA makes sense, as it still allows significant savings, especially if you’re not looking to manage two sets of retirement plans with different rules.

Ticket Prices Increase tonight!

Lock in your lowest rate NOW!

We wanted to give you a heads-up: Tonight, the ticket price increases for the Prosperity Conference.

⏰ If you’ve been considering joining us in Las Vegas from March 6-8, 2025, now is the moment to secure your spot at the best rate.

Why should you attend our in-person conference in Las Vegas:

  • Tailored Wealth Strategies: Discover opportunities in real estate and entrepreneurship through curated, expert-led sessions from doctors and industry experts who have elevated their financial growth and long-term prosperity.
  • True Prosperity: Engage in thought-provoking sessions focusing on balancing your physical and mental health, deepening relationships, and achieving fulfillment in every area of life.
  • Like-Minded Community: Connect with forward-thinking doctors and high-achieving professionals who are redefining success. Our community of entrepreneurial doctors isn’t just discussing change—they’re actively making it happen.
  • Actionable Insights and Personalized Plans: Walk away not just inspired but with a clear, personalized plan for real financial change. Each session is designed to support your entrepreneurial success, enhance your health and mindset, and provide advanced real estate strategies—all geared toward bringing you closer to the holistic life of freedom you desire.

Can’t make it to Vegas?

No worries! We offer a virtual ticket option so you can still gain all the strategies and insights from the comfort of your home.

Give Me The Lowest Rate Now!

 

Remember, ticket prices increase tonight at midnight! Don’t miss out on this opportunity to invest in your future for a wealthier, healthier, and more fulfilling 2025—at the best possible rate. Secure your spot today!

Share this post:

Leave a Comment

Doctor Loan up to 100% Financing

Learn how Vinovest can help you tap into the remarkable growth and global demand for whiskey.

Related Articles

Join Thousands of Doctors on the Path to FIRE

Get exclusive tips on how to reclaim control of your time and finances.