I came across yet another S Corp owner using a SEP IRA instead of a Solo 401(k).
Solo 401(k) vs. SEP IRA for S Corp Owners in 2025
Example: Let’s say you’re paying yourself $125,000 in W-2 wages through your S Corp, here’s how the two retirement plans compare.
1. Contribution Limits
Solo 401(k):
– Employee deferral up to $23,500 (or $31,000 if age 50+)
– Employer contribution up to 25% of W-2 = $31,250.00
– Total potential = $54,750.00 (or $62,250 if 50+)
SEP IRA:
– Employer contribution only: 25% of W-2 = $31,250.00
– No employee deferral
– No catch-up contributions
2. Roth Access
Solo 401(k):
– Roth contributions allowed for the employee portion
– Can implement Mega Backdoor Roth (if plan supports after-tax contributions)
SEP IRA:
– May Allow Roth Contributions after Secure Act 2.0 ( It should be coming out soon, but it might not be ideal from a tax reporting standpoint.)
3. Loan Feature
Solo 401(k):
– Participant loans allowed — up to $50,000 or 50% of account balance
SEP IRA:
– No loan provisions in IRA Accounts
4. Backdoor Roth IRA Compatibility
Solo 401(k):
– Can still complete the Backdoor Roth ira as the solo 401(k) does not count toward the pro-rata rule
SEP IRA:
– Money in the pre-tax IRA assets trigger the pro-rata rule and could cause unexpected taxes
5. Administration Costs
Solo 401(k):
– Easy to set up now
– Must file Form 5500 once assets exceed $250,000 ( This will have a cost)
SEP IRA:
– Simple setup
– No annual filing requirements
For S Corp owners aiming to maximize contributions, maintain Roth flexibility, and preserve a clean Backdoor Roth strategy, the Solo 401(k) offers significant strategic advantages in 2025. I expect Solo 401(k) adoption to grow steadily in the coming years as more business owners recognize its flexibility and tax planning benefits.
Disclosure: For a comprehensive review of your personal situation, always consult with a tax or legal advisor. Neither Opes Private Wealth Management nor any of its representatives may give legal or tax advice. B Riley Wealth Management does not provide legal or tax advice. This information is intended for the individual addressed. Any dissemination, distribution, or copying of this message is strictly prohibited.