If your SEP IRA was the right answer in year one, here’s why it usually isn’t in year five.
If you’re a solopreneur saving for retirement and you opened a SEP IRA five minutes after starting your business, you’re not alone. SEP IRAs are easy. They take ten minutes at any brokerage. But they’re also leaving real money on the table — and once you see the gap, it’s hard to unsee.
Here’s the conversation we have with most solopreneur clients in the second or third year of their business.
Why SEP IRAs feel like the right answer
You’re solo. You don’t want to deal with plan documents. The SEP IRA wins on simplicity, and that’s a real virtue. For freelancers earning $40K–$60K, it’s totally fine. The math gets uncomfortable somewhere around $80K–$100K of net income, and downright painful past $150K.
The contribution math
Both plans share the same total ceiling — $72,000 in 2026 (the IRS §415(c) limit). What’s different is HOW you fill it.
- SEP IRA: One bucket. 25% of compensation, or about 20% of net SE income for sole proprietors. That’s it.
- Solo 401(k): Three buckets. Employee deferral up to $24,500. Employer profit-sharing up to ~20–25%. Voluntary after-tax up to the §415(c) limit.
For a sole proprietor netting $100,000, the SEP IRA gets you to about $18,587. The Solo 401(k) gets you past $43,000 — without any after-tax contributions. Add after-tax and you can hit the full $72,000.
Roth, loans, and the after-tax bucket
This is where the gap really opens up:
- SEP IRA: No Roth contributions. No loans. No after-tax bucket. None of it.
- Solo 401(k) (with the right plan document): All of it. Roth deferrals, in-plan Roth rollovers, plan loans up to $50,000, and the Mega Backdoor Roth.
That last one is the kicker. The Mega Backdoor Roth is the strategy of contributing voluntary after-tax dollars and then immediately converting them to Roth. For a high-earning solopreneur, it’s the single largest legal Roth funding vehicle available. We’ve seen clients add $30K–$45K of Roth dollars per year through this single strategy.
The catch (there’s always a catch)
- Plan document. To unlock the after-tax bucket, you need a Solo 401(k) plan document that allows it. Free brokerage Solo 401(k)s from Fidelity, Schwab, and Vanguard usually don’t. You’ll want a third-party administrator like MySolo401k or a peer.
- Annual administration. If your Solo 401(k) crosses $250,000 in plan assets, you owe an IRS Form 5500-EZ each year. It’s a one-page form. Don’t lose sleep over it.
- Year-end deadline. The plan must be established by December 31 to make employee deferrals for that tax year. SEP IRAs can be opened up until the tax-filing deadline plus extensions — a real flexibility advantage if you’re late to the party.
When the SEP still wins
- You’re in the launch year of the business and don’t have time to set up a Solo 401(k) before December 31
- You expect to net under $50K and value simplicity over optimization
- You’re already maxing employee deferrals at a W-2 day job (your Bucket 1 is gone — though Bucket 2 still tilts toward Solo 401(k)
When to switch
- Net income above ~$80–100K
- You want Roth contributions
- You want access to the Mega Backdoor Roth
- You want plan loans as a backup liquidity tool
- You expect a big-income year and want to dial up contributions retroactively (Solo 401(k) with after-tax can soak up cash all the way to year-end)
The bottom line
The SEP was the right tool when you were figuring out if your business would survive. The Solo 401(k) is the right tool when it’s working.
If you want help running the math on which one fits your business this year, schedule a planning conversation with WLTH Management. We do this with solopreneurs every week, and the gap is usually larger than people expect.
This document is for educational purposes only and does not constitute tax, legal, or investment advice. WLTH Capital Management, LLC is a registered investment advisor. Strategies discussed may not be appropriate for all investors. Please consult your tax advisor and financial advisor on application to your specific situation.