SEP IRA vs. Solo 401(k): Which Has the Highest Contribution Limit? The Answer Might Surprise You

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There are several different ways for self-employed individuals to save and invest for retirement, and two of the top account types are the SEP IRA and the Solo 401(k). Both are readily available through many major online brokers, and both can be used to invest in stocks, bonds, ETFs, mutual funds, and more. And both account types allow eligible participants to set aside lots of money for retirement. But which will allow you to contribute the most money on a tax-deferred basis?

First, when I tell you that the overall contribution limit for both types of accounts is $69,000 in 2024, this might sound like a trick question. But there are some key differences that could allow you to contribute significantly more to one than the other.

SEP IRA contribution limits for 2024

As mentioned, the overall SEP IRA contribution limit for 2024 is $69,000, but there are a few things to unpack here.

First, all contributions made to a SEP IRA are designated as coming from the employer. Of course, self-employed individuals fill the role of both the employer and employee. But from a technical perspective, SEP IRA contributions are all considered to be from the employer.

This is most significant because it means that there are no catch-up contributions for SEP IRA investors 50 years of age or older, like there are with traditional and Roth IRAs, as well as most other types of tax-advantaged retirement accounts.

Second, contributions are limited to 25% of your net self-employment income, up to a maximum of $345,000. I'll spare you the math, but because half of the self-employment tax is excluded from your net income, this effectively limits your maximum contribution to approximately 20% of your net income.

Solo 401(k) contribution limits for 2024

Another way to save for retirement as a self-employed individual is with a one-participant 401(k) plan, also known as a Solo 401(k). These accounts have the same overall contribution limit of $69,000 as a SEP IRA, but there are some big differences.

First and foremost, just like with a 401(k) plan through an employer, there can be both employer and employee contributions. Up to $23,000 of your contributions can be considered employee contributions -- technically called elective deferrals in 401(k) terms.

401(k) employer contributions have the same "25% of net self-employment income" rule as SEP IRAs, but because the $23,000 employee contribution can be made as well, it usually results in a higher contribution limit for all but the highest-earning self-employed individuals. (We'll look at an example in the next section.)

Second, if you are 50 years old or older, you can make a catch-up contribution of as much as $7,500 -- and this is on top of the $69,000 limit. In other words, if you are 50 or older, this means that you may be able to put as much as $76,500 in a solo 401(k) for 2024.

An example

Let's look at an example. We'll say that your self-employment net profit is $200,000 for 2024. The IRS has a handy worksheet you can use to calculate your SEP IRA contribution limit, and because self-employment tax for a $200,000 income would be $13,353, the calculated SEP IRA contribution limit for 2024 is $37,329.

If you chose to use a Solo 401(k) instead, this same employer contribution limit would apply to you. However, you could also choose to contribute as much as $23,000 -- designated as an employee contribution -- which would bring your total limit to $60,329. Plus, if you are 50 or older, you could add another $7,500 for a grand total of $67,829.

The bottom line

The short version is that for most self-employed people, the Solo 401(k) allows for higher contribution limits. There are some downsides to using a Solo 401(k), such as generally more required paperwork than a SEP IRA, and of course, not everyone needs to save anywhere near the $69,000 limit each year for a comfortable retirement. Having said that, if your priority is to save as much as legally possible, the Solo 401(k) could be right for you.

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