No Employees Yet? SEP-IRA vs. Solo 401(k) for Insurance Agency Owners

You did the hard part. You set a reasonable salary, ran it through payroll, and your S corp is doing its job. Now the good years are producing more than you need to live on, and the question shifts from “How do I pay myself?” to “Where do I put the rest?” For an agency owner with no employees, that usually comes down to two plans: a SEP-IRA or a solo 401(k).

This is a follow-up to our reasonable compensation guide for agency owners, which explains why your salary number matters. It turns out that number also sets the ceiling on how much you can save.

The takeaway: at the same reasonable salary, a solo 401(k) can shelter substantially more than a SEP, because it adds an employee contribution on top of the same employer contribution a SEP makes. The SEP's advantage is simplicity. The solo 401(k)'s advantage is measured in tens of thousands of dollars.

First, Who a Solo 401(k) Is For

This article assumes an agency where you are the only owner, with no eligible employees other than a spouse who works in the business.

Properly classified independent contractors generally do not count as employees here, so an agency that runs on contract producers may still qualify.

W-2 staff change the picture. An employee generally must be allowed to make 401(k) contributions once they reach age 21 and complete a year of service of at least 1,000 hours. Long-term part-time employees can also become eligible after two consecutive years of at least 500 hours. Once an employee is eligible, a one-participant plan no longer fits: you either bring them into a full 401(k) and take on those requirements, or use a different plan.

A SEP can still work with employees, but it cuts the other way. If you contribute for yourself, you generally have to contribute the same percentage for eligible staff, and they put in none of their own money to receive it. SEP eligibility also reaches back over time, with a common standard of age 21, work in three of the last five years, and a minimum amount of compensation, so even part-time help eventually counts. If you have staff or plan to hire, look at your options, a safe-harbor 401(k) among them, before you set anything up. Everything below assumes the true one-person shop.

Why the Same Salary Funds More

A SEP has one bucket: an employer contribution of up to 25% of your W-2 wages. On a $60,000 salary, that is $15,000, and that is the whole plan.

A solo 401(k) has two. The same $15,000 employer contribution, plus an employee contribution of up to $24,500 in 2026 that you make from your own paycheck. The employee bucket is limited by your compensation but not capped at 25% of it, and that is where the extra room comes from.

Two things worth saying plainly: your S corp distributions do not raise either plan's limit, only W-2 wages count, and we are using $60,000 as an illustration, not a recommended salary.

The Two Plans on a $60,000 Salary

On a $60,000 salary, a SEP tops out at $15,000. A solo 401(k) reaches $39,500, the $15,000 employer contribution plus the $24,500 employee contribution, assuming you have not already used that employee limit through another employer's plan. Same salary, same agency, $24,500 more sheltered.

If your plan allows catch-up contributions, an owner 50 to 59 (or 64 and up) can add $8,000, for $47,500; ages 60 to 63 can add $11,250, for $50,750. Contributions made the traditional way generally lower your current taxable income, though the exact benefit depends on your bracket and other deductions. You pay the tax later, when you withdraw.

The Commission Cash-Flow Angle

Agency income rarely arrives in twelve equal pieces. You have steady commissions plus one or two larger checks, and the plan you choose should work with that.

A SEP is the flexible one: you can decide the contribution percentage after the year is over and fund it up to your business return deadline, extensions included. If you are not sure the big check is coming, you can wait and see.

A solo 401(k) rewards a little planning. The auto-pilot approach is to defer a steady amount from each paycheck and leave the employer contribution as the number you decide once the year's contingent income is in.

Traditional or Roth?

If your solo 401(k) offers a Roth option, you can direct some or all of your employee contribution to Roth instead of traditional. Same limit either way. Traditional lowers your taxable income now; Roth does not, but qualified withdrawals, earnings included, come out tax-free later.

Do not assume a modest salary means a low bracket. Your share of agency profit flows through to your personal return alongside the rest of your household income, so the traditional-versus-Roth call should reflect that whole picture. Roth tends to win in a lower-income year; traditional tends to win when your current rate is high.

An Additional Option: The Mega Backdoor Roth

For 2026, total contributions other than catch-ups cannot exceed the lesser of $72,000 or 100% of your compensation. On a $60,000 salary, that ceiling is about $60,000, and the $39,500 above leaves roughly $20,500 of unused room.

A plan built for it can let you fill that room with voluntary after-tax contributions and convert them to Roth, the so-called mega backdoor Roth. For an owner under 50 who makes the full $24,500 as Roth, that can mean about $45,000 into Roth between contributions and conversion, on top of the $15,000 employer contribution. The catch: you need a plan document that specifically allows after-tax contributions and in-plan conversions, so ask before you assume yours does.

A Real Example

We recently set this up for a one-person Minnesota agency that had just elected S corp with a SEP on the to-do list. On the owner's reasonable salary, the SEP would have topped out around $15,000. We opened a solo 401(k) instead, set a steady employee contribution from monthly payroll, and left the employer contribution flexible for later. Same agency, same salary, more room for retirement, and a plan that worked with the cash flow.

So Which One?

If you want to save more than a SEP allows at your salary, the solo 401(k) is usually the stronger choice, and the extra employee bucket is the difference. A SEP earns its place when simplicity matters most and its limit already covers what you want to put away.

One tradeoff to weigh: the solo 401(k) carries a bit more administration. Once plan assets pass $250,000 you generally file a short Form 5500-EZ each year, and a final one when you close the plan; a SEP has no such filing. Neither is a reason to default into the wrong plan.

The point is to choose on purpose. Before you open a SEP because it is easy, compare what each would let you save at your actual salary.

If you want help lining up your salary, retirement contributions, and agency cash flow, book a free discovery call, no pitch, just a look at your situation.