When to Move From a SEP-IRA to a Solo 401(k)

01Reason one: you want more in at the same income

This is the main event. A SEP contribution is a percentage of compensation. A solo 401(k) lets you contribute as the employee through salary deferral and as the employer — so at moderate income levels you can generally get more in than a SEP allows, sometimes substantially. The gap narrows as income rises. The IRS one-participant 401(k) page sets out both components.

02Reason two: you want Roth treatment

A SEP is a pre-tax vehicle. Many solo 401(k) plans offer a Roth deferral option, letting you pay tax now and withdraw tax-free later. In a year when your income is unusually low — a first year, a slow year, a year you took time off — the deduction is worth less and the Roth option is worth more. This is the reason people most often overlook.

03Reason three: you want to borrow against it

Solo 401(k) plans can permit participant loans. IRAs, including SEP-IRAs, cannot. Whether borrowing from your retirement plan is a good idea is a separate conversation — usually the answer is no — but if the option matters to you, only one of these two offers it.

04The reason not to switch

Administration. A solo 401(k) is a real plan: a plan document, more care at year end, and an annual filing obligation once plan assets pass a threshold. If your contribution is modest and a SEP already accommodates it, switching buys you paperwork and nothing else. I have talked more people out of this move than into it.

05And the condition that ends the conversation

A solo 401(k) is for a business with no eligible employees other than the owner and a spouse. Hire someone who qualifies and the plan stops being a solo 401(k) — it becomes a regular 401(k), with the testing and cost that implies. If hiring is on the horizon, factor that in before you move, not after.

06Timing matters more than people think

The two plans have different establishment deadlines, and a SEP is generally the more forgiving of the two late in a year. That is a genuine reason to leave a switch until the following year rather than rush it — and a genuine reason to decide in October rather than the following April.

This article is general information, not individualized tax, legal, or financial advice. Every situation is different — reach out and we'll look at yours directly.