Solo 401(k) vs SEP-IRA vs SIMPLE

A solo 401(k) allows more at every income, and unlike a SEP it leaves the backdoor Roth open — which is often worth more than the extra room.

The contribution comparison is the one every article runs. It is real, and it is usually not what decides the question.

The room, first, because it is quick

Net profit	Net earnings	SEP-IRA	SIMPLE IRA	Solo 401(k)	Solo over SEP
$30,000	$27,881	$5,576	$17,836	$27,881	$22,304
$60,000	$55,761	$11,152	$18,673	$35,652	$24,500
$100,000	$92,935	$18,587	$19,788	$43,087	$24,500
$150,000	$139,403	$27,881	$21,182	$52,381	$24,500
$250,000	$235,213	$47,043	$24,056	$71,543	$24,500

The solo 401(k) wins at every row, and the calculation behind each figure is worth seeing once. The interesting line is the SIMPLE against the SEP: the SIMPLE is ahead until about $107,600 of net profit, where both land on $20,000, and behind after it. A flat deferral beats a percentage until the percentage gets big enough.

The difference that usually decides it

Every dollar in a SEP-IRA counts against your backdoor Roth. A dollar in a solo 401(k) does not.

When you convert a nondeductible traditional IRA to a Roth, the taxable share is computed across all your IRAs, and the Form 8606 instructions are explicit that “traditional IRA” includes traditional SEP IRAs and traditional SIMPLE IRAs for this purpose. irs.gov Qualified employer plans — a 401(k) among them — are not in that aggregation.

That is not a small difference and it compounds annually. A SEP built up over a few years can close the backdoor Roth permanently, and the usual fix — rolling the SEP into a 401(k) — requires having a 401(k), which is the plan you did not open.

This is the strongest practical argument for a solo 401(k) and it does not appear in the comparison most people read, because it is a consequence of a rule that lives in a different part of the tax code from the one about contribution limits. The full mechanics, and the fix, are here.

The other differences, briefly

	Solo 401(k)	SEP-IRA	SIMPLE
Roth contributions	Yes, as designated Roth	Traditional by default	Traditional by default
Loans permitted	Generally yes	No — IRAs cannot lend	No
Counts against backdoor Roth	No	Yes	Yes
Annual filing	Form 5500-EZ once assets reach $250,000	None	None
Deadline to open	31 December, with a first-year exception	Filing deadline with extensions	1 October

The Form 5500-EZ threshold is the one cost the solo 401(k) carries that the others do not: once plan assets reach $250,000 at year end, an annual return is required. irs.gov It is a short form and it is not optional, and it is the single most common thing solo 401(k) holders discover late.

When a SEP is genuinely the right answer

Three cases, and they are not rare:

It is March and the year has closed. A SEP can still be opened and funded for the prior year; in most circumstances a 401(k) cannot. The deadlines differ by more than people expect.

You have no interest in a backdoor Roth and never will. The aggregation problem only costs you if you were going to convert. If your income is below the Roth contribution limits anyway, it is not a live constraint.

You want the least possible administration. No 5500-EZ, no plan document to maintain, no deferral election to remember in December. For somebody who will contribute the employer percentage and nothing more, the SEP does that with fewer moving parts.

When a SIMPLE is

Rarely, for a one-person business — but not never. Below the crossover it beats a SEP outright, it has no annual filing, and its administration is light.

The case where it makes sense is a business with a small number of employees where a SIMPLE’s fixed match is cheaper and more predictable than a SEP’s proportional contribution. That is a staffing decision rather than a personal one, and it changes the shape of this whole comparison. An S-corp election changes it again, because it changes what counts as compensation.

The order to decide in

1. Will you ever want a backdoor Roth? If yes, that mostly settles it in favour of the solo 401(k) before contribution limits are considered at all.
2. Has the year already closed? If yes, the SEP may be the only option available.
3. Then compare the room, which is the table at the top.

Most articles run that list backwards.