Choosing Your Retirement Path: Deciding Between Individual 401(k) and SEP IRA

Choosing Your Retirement Path: Deciding Between Individual 401(k) and SEP IRA

By Jonathan Harner, CFP® 

One of the great things about being a business owner is your ability to access powerful tax planning and retirement savings tools in the form of solo 401(k)s and SEP IRAs. But deciding which can be tricky. It is the difference between building a custom-designed house and buying a pre-built home in a housing development.

The solo 401(k) is like a custom-built house. It allows for extensive personalization and flexibility. You can choose exactly how you want each room, pick your materials, and even include unique features that perfectly suit your lifestyle, similar to the contribution, loan, and Roth options of a solo 401(k). However, this comes with a need for more involvement in the process, higher costs, and potentially more complex maintenance, just like the more extensive management and administrative responsibilities of a solo 401(k).

On the other hand, a SEP IRA is like buying a pre-built home. It offers convenience, simplicity, more straightforward choices, and quicker processes. It generally requires less maintenance and up-front cost, similar to the SEP IRA’s more straightforward setup and lower administrative duties. However, you are limited to the designs and options available in the development, reflecting the less flexible options and contribution limits in a SEP IRA.

In both scenarios, the end goal is the same (a comfortable home or comfortable retirement). Still, the choice depends on your desire for customization and flexibility versus ease and simplicity.

Read on to understand the pros and cons of each!

Individual 401(k)

Also known as a solo 401(k), an individual 401(k) is designed for business forms with only one employee, the business owner. The IRS calls it a one-participant 401(k) and only businesses without employees are eligible. 

Key Benefits

  • Roth accounts: As with other 401(k) plans, the individual 401(k) offers both traditional and Roth accounts. With a traditional account, contributions are made pre-tax and taxes are paid upon withdrawal. Roth 401(k)s, on the other hand, are funded with after-tax dollars, but they grow tax-free. This gives you the flexibility to actively choose the contribution style that works best for your specific tax situation
  • Employee deferrals: Individual 401(k) plans also allow employee deferrals in addition to the employer contribution. This option is not available with SEP IRAs.
  • Loan provisions: Another benefit of this plan is the ability to take loans against the account balance up to the lesser of 50% of the balance or $50,000. 
  • Higher contribution limits: Individual 401(k) plans have two types of contribution limits. First is the profit-sharing limit for employer contributions, which is the lesser of 25% of business revenue or $66,000 (will increase to $69,000 for 2024). The next limit is the annual employee elective deferral limit, which is $22,500 for individuals (will increase to $23,000 for 2024), with an additional $7,500 for those over age 50. The combined limit for both employer and employee contributions is $66,000 (or $73,500 if older than 50), but because there are two types of contributions permitted, most self-employed individuals will be able to contribute more and receive a larger tax break than if they used a SEP IRA.


  • Strict reporting requirements: If your account balance exceeds $250,000, you will be required to file an annual return with the IRS. The return consists of Form 5500 and it can be quite extensive. Even if you don’t have $250,000 in your account, you may be required to file.
  • Only available for businesses with no employees: Individual 401(k)s are only available for businesses with no employees except the owner’s spouse. If you have plans to expand your business and hire additional employees, opening an individual 401(k) is probably not for you. You may be required to convert your plan to a qualified 401(k) and contribute on behalf of your employees if you were to hire any.


A Simplified Employee Pension (SEP) IRA functions similarly to a traditional IRA, except as the owner, you set up and contribute to accounts for both yourself and your employees.

Key Benefits

  • Higher contribution limit: In 2023, the contribution limit for a SEP IRA is the lesser of 25% of an employee’s compensation or $66,000 (will increase to $69,000 in 2024). This limit is higher than the limit for tax-advantaged accounts like traditional and Roth IRAs, but as mentioned above, it’s not as high as the limits for individual 401(k) plans.
  • Easy setup & maintenance: SEP IRAs do not require the extensive reporting requirements required by other qualified retirement plans. You are also not responsible for the underlying investments in your employees’ accounts. As the employer, you simply choose the financial institution you want to work with and you open the accounts. Beyond that, it is the employees’ responsibility to choose and manage their own investments. Additionally, many financial institutions offer SEP plans with little to no management fees, making this a very inexpensive and attractive option for small business owners.
  • Contributions are discretionary: Contributions to these plans are flexible and discretionary, meaning you can adjust your contributions as your cash flow changes. This ensures you’re never contributing more than you’re bringing in.  


  • Strict eligibility requirements: According to the IRS, all employees must be allowed to participate in the SEP plan if they are age 21 or older, earned at least $750 in 2023, and worked for you for at least 3 of the last 5 years. This can make SEP IRAs an inflexible option for small businesses that want to limit the number of employees in the plan.
  • When you do contribute, you must contribute to everyone: In the years that you contribute to a SEP IRA, you are required to make equal contributions as a percentage of compensation to all eligible employees. For instance, if you contribute 20% of your income to your own SEP IRA, you must then contribute 20% of every employee’s income to their respective accounts. Because of this, SEP IRAs are generally recommended for self-employed individuals or small businesses with very few employees.
  • No loan provisions, catch-up contributions, or employee deferrals: Many of the benefits offered by individual 401(k)s are not available for SEP IRAs.

Choosing the Right Plan for You

Whether you’re a solopreneur or part of a small business entity, the truth is taking action on your retirement plan sooner rather than later better serves your long-term financial success. At Wichita Wealth Management, we have specific experience assisting people like yourself in choosing the most ideal retirement plan for both you and your business.

If you’re ready to take the next step, we invite you to schedule a no-obligation consultation where we can explore whether we are the right partners for you on your path to a stable and comfortable retirement. Reach out to us by calling me at 316-722-1010 or emailing

About Jonathan

Jonathan Harner is a CERTIFIED FINANCIAL PLANNER™ practitioner at Wichita Wealth Management, a fee-only, fiduciary financial advisory firm dedicated to helping their clients thoroughly prepare for retirement. Jonathan’s goal is to simplify the complex so his clients can experience confidence and peace of mind as they work toward and live out their retirement dreams. He specializes in developing and implementing tax strategies that maximize his clients’ money and builds a tax-efficient withdrawal plan for retirement. Jonathan loves finding opportunities for his clients to save money and is dedicated to continual learning and growing in his profession so he can provide solutions for his clients’ financial needs. When he’s not working, you can find Jonathan spending time with his wife, Annie, and their daughter, staying active in his church community, and participating in his two favorite (but vastly different) hobbies: CrossFit and Dungeons & Dragons. To learn more about Jonathan and how he can help you, connect with him on LinkedIn.

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