If you’re self-employed and investing in real estate, private lending, or other alternative assets, you’ve probably come across two retirement plans again and again: the SEP IRA and the Solo 401(k). Both are built for business owners. Both can be self-directed. And both can hold the kinds of investments you actually understand.
So which one fits you better? The honest answer is that it depends, but the differences are clearer than most people expect, especially once alternative assets enter the picture.
(And a quick timely note: if you filed an extension on your 2025 personal return, today, October 15, is generally your filing deadline, which may also be your last day to make a 2025 SEP contribution. If that’s you, give your tax advisor a call today.)
Who Each Plan Is Built For
Both plans are designed for people with self-employment income. That includes real estate agents, flippers, wholesalers, contractors, consultants, and other business owners. Keep in mind that rental income is generally considered passive, so it usually doesn’t count toward contributions for either plan.
The biggest eligibility difference comes down to employees. A Solo 401(k) is generally only available if the business has no full-time employees other than the owner and a spouse. A SEP IRA can work for businesses with employees, but eligible employees generally must receive contributions at the same percentage the owner gives themselves.
How Contributions Work
This is where the two plans start to separate.
With a SEP IRA, contributions come from the business as a percentage of your compensation, up to an annual limit. It’s simple and flexible, and you can decide how much to contribute after the year ends.
A Solo 401(k) lets you contribute in two ways: as the employee, through salary deferrals, and as the employer, through a profit sharing contribution. Because of that two-part structure, a Solo 401(k) can often allow you to put away more money at moderate income levels than a SEP would. Investors age 50 and over may also be able to make additional catch-up contributions in a Solo 401(k), which a SEP doesn’t offer.
At higher income levels, the total amounts can end up closer together, so the right choice depends on your actual numbers.
Roth Options
Many Solo 401(k) plans allow a Roth option for your employee deferrals, meaning you can choose to pay tax now for tax-free growth later. Recent legislation also opened the door to Roth contributions in SEP IRAs, but that option is still relatively new and not every provider offers it yet. If building your tax-free bucket is a priority, this is worth comparing closely.
Why Alternative Assets Change the Conversation
For investors who stick to stocks and funds, the SEP and Solo 401(k) can look pretty similar. For self-directed investors, a few differences become much more important.
Financing Real Estate
This is one of the biggest ones. When an IRA, including a SEP IRA, buys real estate using a loan, a portion of the income and gains tied to that debt may be subject to a tax called Unrelated Debt-Financed Income, or UDFI. Many real estate investors never see this coming.
A Solo 401(k) is generally treated differently. Qualified plans like a Solo 401(k) can often use certain types of real estate financing without triggering that tax. For investors who plan to use leverage to buy property inside their retirement account, that difference alone can make the Solo 401(k) worth a serious look.
Control and Ease of Transactions
Many Solo 401(k) plans are set up so the business owner serves as trustee of the plan. That can make it easier to act quickly on deals, since you may be able to hold assets and sign documents on behalf of the plan directly.
With a SEP IRA, a custodian holds the account and processes transactions at your direction. Some investors add an LLC structure to their IRA to get more control, but that adds another layer to set up and manage.
More control also means more responsibility. Whether you’re acting as a plan trustee or managing an LLC, you’re responsible for keeping records clean and making sure every transaction follows the rules.
Access to Funds
Many Solo 401(k) plans allow participant loans, meaning you may be able to borrow from your own plan under certain limits and repay yourself. IRAs, including SEP IRAs, don’t allow loans. For investors who value having a backup source of liquidity, that’s worth knowing.
Simplicity and Paperwork
This is where the SEP IRA tends to win. It’s quick to set up, easy to maintain, and in most cases doesn’t require an annual filing for the plan itself.
A Solo 401(k) takes a bit more work. There’s a formal plan document, and once the plan grows beyond a certain size, an annual informational return is required. It’s not burdensome, but it is one more thing to keep on your calendar.
Timing is different, too. A SEP IRA can generally be set up and funded as late as your tax filing deadline, including extensions. Solo 401(k) deadlines are a bit more nuanced, especially for employee deferrals, so it’s best to plan ahead if you’re leaning in that direction.
The Rules That Apply to Both
Whichever plan you choose, the same core rules for self-directed investing apply. The plan owns the investment, not you personally. You can’t use plan assets for personal benefit, and certain transactions with yourself or close family members are prohibited. Understanding these rules up front protects your account and your peace of mind.
So Which One Is Right for You?
A SEP IRA may be a good fit if you want the simplest possible setup, you have employees or expect to hire soon, or you like the flexibility of deciding on contributions after the year ends.
A Solo 401(k) may be a better fit if you have no employees other than a spouse, you want to maximize contributions at moderate income levels, you’re interested in Roth contributions, or you plan to use financing to buy real estate inside your plan.
The Bottom Line
Both plans can be powerful tools for self-employed investors who want to put retirement dollars to work in alternative assets. The best choice depends on your business, your income, and how you plan to invest. Talking it through with your tax advisor, using your real numbers, is the best next step.
Have questions about how either plan works as a self-directed account? Reach out any time at hello@midatlanticira.com, or join us on an upcoming National Strategy Call.
MidAtlantic IRA, LLC is a self-directed IRA administrator and custodian, not an investment advisor. This article is for educational purposes only and is not tax, legal, or investment advice. Please consult your own tax and legal professionals before making decisions about your accounts.