Why CRE Brokers Should Choose a Solo 401(k) Over a SEP-IRA

As a commercial real estate (CRE) broker, selecting the right retirement plan is crucial for maximizing tax efficiency and long-term wealth accumulation. While both SEP-IRAs and Solo 401(k)s offer valuable tax benefits and are designed for self-employed individuals, the Solo 401(k) provides greater flexibility and higher contribution potential, making it the superior choice for most CRE brokers.

Overview of SEP-IRA vs. Solo 401(k)

SEP-IRA: Key Features and Limitations

A SEP-IRA (Simplified Employee Pension Individual Retirement Account) allows business owners to make tax-deductible contributions for themselves and any employees. However, contributions are entirely employer-funded, which creates several limitations:

Contribution Limits: In 2025, the maximum contribution is 25% of net earnings, up to a limit of $70,000.
Employer-Only Contributions: Unlike a Solo 401(k), there is no employee deferral component.
Tax Treatment: Contributions are tax-deductible, and funds grow tax-deferred, but withdrawals in retirement are taxed as ordinary income.
No Roth Option: SEP-IRAs do not allow Roth contributions, meaning all withdrawals are taxable in retirement.
Limited Contribution Potential: At lower income levels, contribution amounts are significantly restricted compared to a Solo 401(k).
Interference with Backdoor Roth IRA Strategy: SEP-IRA balances are subject to the pro-rata rule, which can create tax complications when converting funds to a Roth IRA.

Solo 401(k): Key Features and Advantages

A Solo 401(k) is designed for business owners with no employees (other than a spouse). It offers multiple advantages over a SEP-IRA:

Higher Contribution Limits:
- Employee Contribution: Up to $23,500 in 2025 ($31,000 if age 50+ with catch-up contributions).
- Employer Contribution: Up to 25% of net earnings, with a total maximum contribution of $70,000 ($77,500 if 50+).
- Advantage at Lower Income Levels: Unlike a SEP-IRA, the Solo 401(k) allows for meaningful contributions even at lower earnings levels.
Dual Contribution Flexibility: Allows contributions as both an employee (salary deferral) and an employer (profit-sharing), providing greater flexibility.
Roth Option Available: Unlike a SEP-IRA, Solo 401(k)s allow Roth contributions, enabling tax-free growth and withdrawals in retirement.
Exempt from Pro-Rata Rule for Roth Conversions: This means a Solo 401(k) will not interfere with your ability to execute a Backdoor Roth IRA strategy.
Loan Option: Allows you to borrow from your account, up to 50% of the balance or $50,000, whichever is lower.
Predictable Contributions: Since contributions can be made both as employee and employer, you have greater control over your retirement savings strategy.

Why the Solo 401(k) is the Better Choice for CRE Brokers

1. Maximizing Contributions at Lower Income Levels

For brokers with moderate income levels, the Solo 401(k) allows significantly higher contributions compared to a SEP-IRA. For example:

Income: $50,000
- SEP-IRA Contribution: 25% of $50,000 = $12,500
- Solo 401(k) Contribution: $23,500 (employee) + $12,500 (employer) = $36,000
- Advantage: The Solo 401(k) allows nearly 3x the contribution at the same income level.

2. Greater Tax Flexibility with Roth Contributions

The Solo 401(k) offers a Roth option, allowing tax-free growth and withdrawals in retirement.
SEP-IRA funds are entirely pre-tax, meaning all withdrawals will be taxed in retirement.

3. No Interference with the Backdoor Roth IRA Strategy

If you plan to use a Backdoor Roth IRA, a SEP-IRA complicates the process due to the pro-rata rule.
A Solo 401(k) does not count toward IRA balances, preserving the full benefit of Backdoor Roth conversions.

4. Contribution Predictability and Planning

Solo 401(k)s allow for fixed employee contributions (up to $23,500 or $31,000 if 50+), making retirement planning more predictable.
Employer contributions can be adjusted based on business profits, providing added flexibility.
In contrast, a SEP-IRA only allows employer contributions, which can be restrictive in lean income years.

5. Loan Access for Financial Flexibility

A Solo 401(k) permits loans of up to $50,000 or 50% of the account balance, whichever is lower.
SEP-IRAs do not allow loans, limiting financial flexibility if you need liquidity.

Final Verdict: Solo 401(k) Wins for CRE Brokers

For self-employed CRE brokers, a Solo 401(k) offers superior contribution potential, tax flexibility, and strategic advantages over a SEP-IRA.

If your goal is to maximize retirement savings, maintain tax efficiency, and utilize a Roth strategy, a Solo 401(k) is the best option.

For most independent CRE brokers, a Solo 401(k) is the clear winner for tax-advantaged retirement savings.