SEP IRA vs Solo 401(k): Which Is Better for Phoenix Business Owners?
If you are a business owner in Phoenix, you have two powerful retirement savings tools. Most people only know about one.
The SEP IRA is simple, widely available, and lets you contribute up to roughly 20-25% of net self-employment earnings (the exact calculation depends on your business structure; for sole proprietors, it is approximately 20% of net earnings after self-employment tax, which works out similarly to 25% of compensation). The 2026 limit is $69,000. The Solo 401(k) has the same $69,000 limit but offers something the SEP does not: a employee contribution of up to $23,000 plus an employer match — and if you are 50 or older, a $7,500 catch-up contribution.
For a high-earning solo practitioner or small business owner, the Solo 401(k) often allows significantly more tax-deferred savings. But more is not always better. The right choice depends on your business structure, your income, whether you have employees, and how much administrative complexity you are willing to handle.
The Decision Framework
Factor 1: Do You Have Employees?
This is the first filter.
SEP IRA: If you have employees, you must contribute the same percentage of compensation for all eligible employees that you contribute for yourself. This can get expensive fast if you have a team.
Solo 401(k): Only available if you have no full-time employees (other than a spouse). If you hire even one full-time employee, the Solo 401(k) becomes a regular 401(k) with ERISA compliance requirements, nondiscrimination testing, and Form 5500 filing obligations.
Factor 2: Your Income Level
For lower-earning business owners, the SEP IRA may be sufficient. But as income rises, the Solo 401(k) pulls ahead:
Example — $100,000 net business income:
SEP IRA max: ~$18,587
Solo 401(k) max: $23,000 (employee deferral) + ~$18,587 (employer match) = ~$41,587
Example — $200,000 net business income:
SEP IRA max: ~$46,000
Solo 401(k) max: $23,000 + ~$46,000 = $69,000 (hits the limit)
Factor 3: Roth Options
SEP IRA: Only traditional, pre-tax contributions. No Roth option.
Solo 401(k): Can offer a Roth option for employee deferrals. This is powerful if you expect to be in the same or higher tax bracket in retirement, or if you want tax diversification.
Factor 4: Administrative Complexity
SEP IRA: Minimal paperwork. Set up in minutes with most custodians. No annual filing requirements until assets exceed certain thresholds.
Solo 401(k): More complex. Requires a plan document, annual reporting (Form 5500-EZ once assets exceed $250,000), and more careful record-keeping.
Factor 5: Loan Access
SEP IRA: No loan provisions. Early withdrawals before 59½ face taxes plus 10% penalty.
Solo 401(k): Allows loans up to 50% of the vested balance (max $50,000). This creates a liquidity backstop for business owners who may need access to capital without triggering taxable events.
Common Mistakes to Avoid
Mistake 1: Choosing based on contribution limits alone
The highest contribution limit only matters if you can afford to hit it. A SEP IRA with lower contributions and zero administrative burden may be the right choice for a business owner who is reinvesting heavily in growth.
Mistake 2: Ignoring the employee factor
Business owners often set up a Solo 401(k) without realizing that hiring one full-time employee changes everything.
Mistake 3: Missing the Roth opportunity
If you set up a Solo 401(k) but do not elect the Roth option, you are leaving tax diversification on the table.
Mistake 4: Not integrating with overall tax strategy
Retirement contributions affect your Qualified Business Income (QBI) deduction under Section 199A.
What This Looks Like in Practice
Scenario A: Solo consultant, $150,000 net income, no employees, age 45
Winner: Solo 401(k) — significantly more contribution room, Roth option available
Scenario B: Small agency, $300,000 net income, 3 part-time contractors, considering hiring full-time
Winner: SEP IRA for simplicity, or plan to transition to a regular 401(k) when hiring
Scenario C: Real estate investor with LLC, $80,000 net rental income, age 52
Winner: Solo 401(k) — catch-up contribution is valuable, loan provision provides liquidity
Schedule a Call with Zach
Every retirement plan decision is personal. The rules are the same, but your business — your income, your growth trajectory, your tax situation, your employee plans — is not.
If you are a Phoenix business owner and want to know which retirement plan actually fits your specific situation, a 15-minute conversation can give you clarity.
Schedule a Call with Zach — Calendar Link
Zachary Holly, CFP® | Osaic Wealth | Scottsdale, AZ
Investment advisory services offered through Osaic Wealth, Inc. | Check Zach background on BrokerCheck