How to choose between plans when you want to maximize your savings but downsize your paperwork

Choosing the right retirement plan for yourself as a self-employed individual is important, and doesn't have to be that complicated.

Gig workers and independent contractors deciding whether to save for retirement through a SEP IRA or solo 401(k) might assume the choice is easy.

It isn't.

Exhibit A: me.

Years ago, because I was a freelance writer, I opened a SEP IRA. Later, I rolled the money into a solo 401(k), thinking that it would allow me to save more for retirement.

It did. But that additional contribution flexibility came with additional paperwork.

I had to start filing Form 5500-EZ once per year. And I found that to be a bit of a hassle. See below. Plus, once you file a Form 5500-EZ it's there for all the world to see. Your business becomes the business of everyone and anyone. It's all public information.

Before we dive in, let's do a quick breakdown of the difference between the two. A SEP IRA and a solo 401(k) are both used by self-employed individuals like myself, but a SEP IRA allows only employer contributions, while a solo 401(k) allows contributions as both the employee and the employer.

Of note, solo 401(k) plans with assets of $250,000 or less generally do not have to file the form, though a final Form 5500-EZ must be filed for the year in which the plan is formally terminated and all its assets are distributed.

That got me wondering whether the extra flexibility was worth the paperwork. Would I be better off rolling the money back into a SEP IRA?

I started by asking ChatGPT Plus.

Its answer was straightforward: Don't abandon the solo 401(k) merely to avoid filing Form 5500-EZ. One annual filing may be a reasonable price to pay for the plan's greater flexibility.

The SEP IRA vs. the solo 401(k)

The solo 401(k)'s biggest advantage may be its contribution structure. A business owner can contribute as both employee and employer.

In 2026, the employee elective-deferral limit is $24,500. Someone age 50 or older may contribute an additional $8,000. Total employee and employer contributions, excluding catch-up contributions, may reach $72,000.

That means someone age 50 or older could potentially contribute as much as $80,000, assuming sufficient eligible compensation and a plan that permits catch-up contributions. (Also, those who turn age 60, 61, 62 or 63 during the calendar tax year are eligible for the super catch-up amount, which is the greater of $10,000 or 150% of the standard age-50 catch-up limit for that year, indexed for inflation.)

A SEP IRA also has a $72,000 contribution limit for 2026, but reaching it requires significantly more income. A sole proprietor can generally contribute about 20% of adjusted net earnings, with no employee deferral or age 50 catch-up contribution.

That can make the solo 401(k) more valuable in a lower-income year. A sole proprietor earning $60,000, for example, may be able to contribute as both employee and employer, plus make an age 50 catch-up contribution. With a SEP IRA, the contribution would generally be limited to about 20% of adjusted net earnings.

Both plans remain subject to compensation and contribution limits, and the precise amount requires a separate calculation. But the solo 401(k)'s two-part contribution structure may allow a self-employed worker to save more without earning an exceptionally high income.

The plans differ in other ways.

More solo 401(k) perks

A solo 401(k) can permit pretax contributions, Roth contributions or both. SECURE 2.0 also permits Roth SEP contributions, although employers are not required to offer them and availability may depend on the financial institution.

A solo 401(k) may allow participant loans if the plan document permits them. SEP IRA loans are prohibited.

Then there is a less obvious difference that could matter to anyone using the backdoor Roth IRA strategy.

Pretax money held in a solo 401(k) generally is excluded from the IRA pro-rata calculation. Pretax money held in a SEP IRA is included.

The IRS treats a person's traditional, rollover, SEP and SIMPLE IRAs as one combined account when calculating the taxable portion of an IRA distribution or Roth conversion, according to Ed Slott & Co. Solo 401(k)s, other employer plans, Roth IRAs and inherited IRAs generally are not included.

Suppose someone makes a nondeductible traditional IRA contribution and then converts it to a Roth IRA. If that person has no other pretax IRA assets, most or all of the conversion may be tax-free, apart from any investment earnings before the conversion.

If the person also has a large pretax SEP IRA, however, the pro-rata rule applies. Only a proportionate share of the conversion would be tax-free.

Rolling a large solo 401(k) balance into a SEP IRA could therefore turn an expected tax-free or nearly tax-free backdoor Roth conversion into a mostly taxable transaction.

The solo 401(k)'s principal drawback is administration. It has more rules, more recordkeeping and more deadlines. Filing Form 5500-EZ may not be especially difficult, but missing the deadline can result in significant penalties.

The SEP IRA is simpler. Employers generally do not file Form 5500, and the financial institution handles much of the reporting.

Investment choice may be something of a toss-up. It depends largely on the provider, available investments and fees.

What the advisers said

So far, the case for keeping my solo 401(k) seemed fairly strong. But I wanted to know whether financial advisers saw it the same way.

They did, although they emphasized that the decision depends on more than contribution limits.

"For most self-employed clients with no employees, I favor the solo 401(k) because it offers more contribution flexibility," said Matthew Hess, a certified financial planner with Berman McAleer. "The owner can contribute as both employee and employer, potentially allowing for greater savings and more control over taxable income."

Hess also noted that rolling pretax IRA assets into a solo 401(k), provided the plan accepts incoming rollovers, can help preserve the backdoor Roth strategy by removing those assets from the IRA pro-rata calculation.

The calculation also changes if a business has employees. Under a SEP IRA, an employer generally must contribute the same percentage of compensation for eligible employees as the owner receives. That can make maximizing the owner's contribution expensive.

"For me, it usually comes down to flexibility versus simplicity," Hess said.

Marcos Segrera, a certified financial planner with Evensky & Katz Wealth Management, said the choice begins with five questions: How much do you earn? How much do you want to save? Do you expect to hire employees? Do you want a Roth option? And how much administrative work are you willing to accept?

"The solo has a special place in my heart because you can contribute as both the employee and the employer, which typically allows larger contributions at lower income levels," Segrera said.

But he warned against allowing the choice to become an excuse for postponing saving.

"Most importantly, don't let 'perfect' be the enemy of 'good enough,'" Segrera said. "Get one opened and funded."

Kashif Ahmed, a certified financial planner and president of American Private Wealth, offered a similar framework. He said a SEP IRA generally works best for someone who wants a simple, low-cost plan with minimal paperwork. A solo 401(k) often works better for someone who wants to maximize savings and is willing to assume the additional administrative responsibilities.

Ahmed said the decision should reflect the worker's income, age, desired savings, plan expenses and tolerance for paperwork.

The advisers' answers all pointed in the same direction: The SEP IRA wins on simplicity. The solo 401(k) wins on flexibility.

For someone just starting to save, picking one is better than waiting for the perfect account. But for a self-employed person age 50 or older who wants to maximize contributions, preserve the backdoor Roth option and retain access to other plan features, the solo 401(k) offers important advantages.

Which brings me back to my decision.

Moving the money into a SEP IRA would eliminate Form 5500-EZ and simplify the account's administration. But it would also eliminate my ability to make an age 50 catch-up contribution to that plan, reduce my contribution flexibility and bring the pretax balance into the IRA pro-rata calculation.

For now, filing one more form each year appears to be a reasonable price for keeping those options open.

-Robert Powell