Solo 401(k) vs. SEP-IRA: The Retirement Strategy for Self-Employed Texans

Self-employed individuals and small business owners have access to retirement contribution limits that are dramatically higher than traditional W-2 employees. While an employee can contribute up to $23,000 to a 401(k) in 2024 (plus catch-up), a self-employed person can contribute up to $69,000 — more than triple — through a Solo 401(k) or SEP-IRA.

These contributions are pre-tax, which means they reduce your taxable income dollar-for-dollar. At a combined federal and state effective rate of 30–40%, a maxed-out retirement account saves $20,000–$28,000 in taxes per year — while also building wealth for retirement.

A SEP-IRA (Simplified Employee Pension) is the easier of the two to set up and administer. You can open one at virtually any brokerage (Fidelity, Schwab, Vanguard) and make your first contribution by your tax filing deadline — including extensions. There is no annual filing requirement.

Contribution limit: Up to 25% of net self-employment income (after the SE tax deduction), with a cap of $69,000 in 2024.

Best for: Business owners who want simplicity, file late, or have W-2 employees they would prefer not to cover with a 401(k) plan.

Drawback: If you have employees, you must contribute the same percentage of their compensation as you contribute for yourself. This can make a SEP-IRA expensive for businesses with staff.

A Solo 401(k) — also called an Individual 401(k) or i401(k) — allows for higher contributions at the same income level because you can contribute as both the "employee" and the "employer."

Employee contribution: Up to $23,000 in 2024 ($30,500 if 50 or older). This is a flat dollar amount regardless of income level.

Employer contribution: Up to 25% of W-2 wages (if an S-Corp) or 20% of net self-employment income (sole prop/single-member LLC).

Combined maximum: Up to $69,000 (or $76,500 with catch-up).

For a self-employed person earning $100,000 in net profit, a SEP-IRA allows roughly $18,587 in contributions. A Solo 401(k) allows up to $41,587 — more than double — because the employee component is a flat $23,000.

Many Solo 401(k) providers now allow Roth contributions on the employee portion. This means you can contribute $23,000 (or $30,500) in after-tax dollars that grow and are withdrawn tax-free in retirement — a powerful tool for business owners who expect to be in a higher tax bracket in the future or who want tax diversification.

SEP-IRAs do not offer a Roth option, though you can convert a SEP-IRA to a Roth IRA separately (a taxable event in the year of conversion).

The answer depends on your income, business structure, employee situation, and how much you want to contribute:

Choose a SEP-IRA if: You want simplicity, you file late, your income is high and you can hit the contribution cap without the employee portion, or you have employees whose coverage costs make a 401(k) unattractive.

Choose a Solo 401(k) if: You have no employees (other than a spouse), you want to maximize contributions at a lower income level, or you want the Roth option.

For most solo operators and S-Corp owners with moderate to high income, the Solo 401(k) is the stronger option. But "most" is not "all" — the right answer requires modeling your specific numbers, which is exactly what a good tax advisor should do before you make any retirement contribution decisions.