How a Solo 401(k) and SEP IRA Help S Corp Owners with Retirement Planning

Retirement savings are often overlooked without employer-sponsored plans because of confusing tax laws and competing financial needs. This can lead to stress and uncertainty about long-term security.

But here’s the good news: options like a Solo 401(k) and SEP IRA actually let you put away much more money than your employer plan ever could. That means you start saving for a secure retirement while also unlocking substantial tax savings.

First, let’s look at how forming an S Corp can help your business take control of your finances and retirement.

Benefits of S Corps for Financial Planning

Starting an S Corp can be a game-changer for many solopreneurs, freelancers, consultants, sole proprietors and other self-employed workers. And – contrary to popular belief – you don’t have to choose between an LLC or S Corp — you can have the best of both worlds.

An LLC is your legal structure, while an S Corp is a tax classification you can elect with the IRS.

When you choose S Corp status, the IRS considers you both the employer and employee of your business. It splits your income into two parts:

• Salary: The portion of your income you pay yourself as an employee.
• Distributions: The rest of your profits aren’t subject to self-employment taxes.

As both the employer and the employee of your business, you can enjoy several perks, including:

• Maximizing your tax benefits.
• Deducting health insurance premiums.
• Purchasing equipment and writing off the depreciation.
• Applying for business loans and credit.

But here’s where it gets better — S Corps can also use a SEP IRA or Solo 401(k) for retirement planning. Let’s take a closer look at both of these options:

Solo 401(k) vs. SEP IRA

A Solo 401(k) and SEP IRA are retirement plans for self-employed individuals, such as freelancers, contractors, fractional workers, consultants, and more. While they share similarities, there are some important differences between the two.

What is a Solo 401(k)?

A Solo 401(k) works like a traditional 401(k), but it’s specifically for business owners with no employees (other than a spouse). This plan allows you to contribute in two ways:

• As an employee: For 2024, you can defer up to $23,000 of your earned income (your net self-employment income after deductions) and up to $23,500 in 2025. If you’re 50 or older, you can add a catch-up contribution of $7,500 for 2025, which rises to $11,250 if you’re 60, 61, 62 or 63.
• As the employer: You can contribute a maximum of 25% of your earned income. For a solopreneur or sole proprietor, earned income is defined as your net self-employment income after deducting half of your self-employment taxes and your employee contribution.

In total, your contributions can’t exceed $69,000 (or $76,500 if you’re 50 or older). For 2025, the combined contributions can’t be more than $70,000 or 100% of the employee salary, whichever is less. The limit increases to $77,500 for anyone between 50 and 59 and $81,250 for those 60, 61, 62, or 63.

Here’s a quick example:

Let’s say your net self-employment income for 2024 is $100,000. You could defer $23,000 as an employee and contribute another $25,000 as an employer for a total of $48,000 in retirement savings.

Other perks of a Solo 401(k) include:

• Flexibility: You can choose between pre-tax contributions (to reduce your taxable income now) or Roth contributions (for tax-free withdrawals later).
• Loans: You can also borrow from your account to help with other aspects of your financial planning.

What is a SEP IRA?

A Simplified Employee Pension (SEP) IRA is usually a simpler retirement planning alternative to a Solo 401(k). Any employer can establish a SEP IRA, including a self-employed person. Here’s how it works:

You can contribute up to 25% of your net compensation, and, similar to a Solo 401(k), SEP contribution limits are $69,000 as of 2024. Contributions are tax-deductible, meaning they lower your taxable income, and you can keep more of what you earn.

While a SEP IRA is often easier to set up and maintain, it lacks some of the features of a Solo 401(k):

• No Roth option: Contributions are pre-tax only.
• Employer-only contributions: You can’t contribute as both an employer and employee.

Let’s look at our previous example:

If your net self-employment income is $100,000, you could contribute $25,000 (25%) toward your retirement savings with a SEP IRA. Since you cannot add employee deferrals, your total contributions are quite a bit less than with the Solo 401(k).

Which Retirement Plan is Best for You?

You can have a SEP IRA and a Solo 401(k) as long as your total contributions to both plans don’t exceed the IRS annual limits. A Solo 401(k) is likely the better option if you can only pick one since it offers more features and tax advantages. Here’s a quick breakdown comparing the two:

Simplify Your Retirement Planning with Lettuce

Lettuce makes it easy for customers to get proactive recommendations and easy to invest in their retirement by partnering with Carry to make Solo 401(k)s more accessible (and affordable) for businesses-of-one like yours. Within Lettuce, you can open a Solo 401(k) in just a few minutes and start saving money on your taxes without all the hassle.

Retirement planning doesn’t have to be complicated. Let Lettuce streamline your financial planning so you can take control of your future.

Start maximizing your savings now by opening your Solo 401(k) with Lettuce today!