If you’re self-employed and bringing in solid profits, you’ve probably set up a SEP IRA at some point. A SEP IRA is simple, flexible, and lets you save more for retirement than a traditional IRA. But as your income climbs, could that SEP be holding you back?

Converting it into a solo 401(k) could unlock tax advantages, higher savings potential, and even open the door to a backdoor Roth IRA. Let’s unpack why.

401(k)s: Bigger Savings, Less Self-Employment Tax

SEPs are great for simplicity. You can contribute up to 25% of your net self-employment income, capped at $70,000 in 2025. But a solo 401(k) can be even better for high earners.

That’s because 401(k)s allow for employee and employer contributions. You can contribute up to $23,500 (or $30,500 if you’re 50 or older) as the “employee,” plus an additional 25% of your net self-employment income as the “employer.” That structure could allow you to hit the maximum contribution with less taxable income.

It’s a subtle but powerful advantage. You get to save more for retirement while paying a bit less in taxes along the way. Think of it as keeping more of your hard-earned money working for you, instead of the IRS.

Other Advantages of a 401(k)

Rolling a SEP IRA into a 401(k) offers a few other benefits beyond allowing you to potentially put away more in retirement savings.

• Access to 401(k) loans. You may be able to take a loan from a 401(k), which is not an option with a SEP IRA.
• Tax-free retirement funds. A 401(k) can have a Roth component, allowing you to mix tax-deferred and tax-free savings.
• Greater ERISA protections. Solo 401(k)s have greater protections under the Employee Retirement Income Security Act of 1974 (ERISA). They offer unlimited creditor protection, while there’s a $1 million cap on IRAs.
• Wider range of investment options. One of the primary benefits of participating in a Solo 401(k) plan is that you can usually choose from several investments, including stocks, bonds, ETFs, mutual funds, or even alternative investments like real estate, crypto, precious metals, and private equity.

Backdoor Roth Contributions

If your income is too high to contribute directly to a Roth IRA, the “backdoor” Roth strategy can be appealing. That’s where you contribute to a traditional IRA and then convert it to a Roth. While you pay taxes on any growth when you make the conversion, if you make it within a few days, there may be little to no growth, thus little to no tax implications.

But there’s a big “but.” The IRS’s pro-rata rule can trip you up. This rule says that if you have any pre-tax money in any IRA (traditional IRA, SEP IRA, or SIMPLE IRA), your Roth conversion will be partially taxable. It doesn’t matter if you only meant to convert the after-tax portion. You’ll still owe taxes on a percentage of the total pre-tax balance.

Rolling your SEP IRA funds into a 401(k) effectively removes that balance from the pro-rata equation, clearing the way for clean, tax-efficient backdoor Roth conversions. In other words, a 401(k) can help you sidestep a costly tax headache.

Solo 401(k) vs. Employer-Sponsored Retirement Plan

This advice applies best to solo small business owners or those with only a spouse on payroll. Once you add employees (other than your spouse), the rules shift. A solo 401(k) becomes a full employer-sponsored retirement plan with all the testing, reporting, and potential matching requirements that come with it.

If you have employees, you might still be able to create a traditional 401(k) plan, but you’ll need to factor in those compliance obligations and possibly contribute for your team. It’s not necessarily a dealbreaker, but it’s something to consider (and talk to your tax advisor about) before rolling over your SEP IRA.

Even a Solo 401(k) requires more administration than a SEP IRA. You have to track contributions and file an annual Form 5500-EZ with the Internal Revenue Service (IRS) if plan assets exceed $250,000. That’s why it’s a good idea to work with a Solo 401(k) plan administrator who can simplify these tasks.

How to Roll SEP IRA into 401k

To roll your SEP IRA into a 401(k):

1. Open a solo 401(k) or small business 401(k) if you have employees
2. Contact your SEP IRA custodian to request a direct rollover (a trustee-to-trustee transfer)
3. Deposit the funds into your new 401(k) and confirm that the transfer was completed correctly

Once that’s done, your SEP balance is out of the IRA world. The pro-rata rule no longer applies, and you’ll be free to use the backdoor Roth strategy without unexpected taxes.

You can request a distribution from a SEP IRA at any time, and as long as the distribution check goes directly to your new plan, there will be no tax penalties.

Your SEP Served You Well, But It’s Time to Think Bigger

Rolling your SEP IRA into a 401(k) isn’t just a smart tax move; it’s a strategic upgrade for your financial future. You’ll gain more control, more flexibility, and more opportunities to build wealth efficiently.

So if your income has outgrown your SEP, consider giving your retirement plan an upgrade. A solo 401(k) can help you save more, pay less in taxes, better protect your retirement savings, and finally unlock that elusive backdoor Roth.

And if you’re unsure how the numbers play out in your specific situation, reach out for customized tax advice. It’s worth consulting with a CPA who understands the nuances of self-employed retirement plans. The right move today can make a meaningful difference in your long-term wealth tomorrow.