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Self-Employed Retirement · SEP IRA vs Solo 401k

SEP IRA vs Solo 401k: How to choose the plan that saves you more

If you run a solo business and want to shelter as much income as possible from taxes, a SEP IRA and a Solo 401k are your two strongest options. Both let you contribute up to $72,000 in 2026, but the path to that ceiling is different: the Solo 401k adds an employee deferral layer plus catch-up contributions the SEP cannot match.

This guide covers how each plan structures contributions, the income level where the Solo 401k advantage disappears, when a SEP IRA still makes sense, and the Roth, loan, and catch-up features that separate the two vehicles.

Sumeet GanjuFounder & Investment Adviser
InverseWealth LLCCA RIA · CRD # 333749
Last reviewedJune 4, 2026

This guide provides general information rather than personalized investment, tax, or legal advice. The numbers and frameworks describe how the relevant strategies typically work for the broad population of tech employees with concentrated equity, but they cannot account for your specific cost basis, vesting schedule, state of residence, marriage status, charitable intent, estate plan, AMT carryforwards, or holding-period clocks, all of which materially change the answer in any individual case. To run the numbers on your actual situation, talk to an advisor.

Part one.
How the contribution math works

How each plan structures contributions

A SEP IRA permits only employer contributions, capped at 25 percent of net self-employment income after the deduction for self-employment tax. A Solo 401k permits both an employee elective deferral of up to $24,500 in 2026 and an employer profit-sharing contribution of up to 25 percent of compensation. The combined limit under Section 415(c) is $72,000 for either plan, but the Solo 401k reaches that ceiling at lower income levels because it stacks the deferral on top of the profit-sharing layer.

The distinction matters because most freelancers, consultants, and single-member LLC owners earn between $75,000 and $300,000. In that range, the Solo 401k consistently shelters more income. The SEP IRA catches up only when net earnings exceed roughly $290,000, at which point both plans hit the same $72,000 ceiling and the simplicity argument shifts to the SEP.

SEP IRA contribution formula. Start with your net self-employment income from Schedule SE. Subtract half of your self-employment tax to arrive at adjusted net earnings. Multiply by 25 percent. The result is your maximum SEP contribution, capped at $72,000. IRS Publication 560 provides a rate table and worksheet that handles the circular arithmetic, since the contribution itself reduces the compensation base used in the calculation.

Solo 401k contribution formula. Begin with the same adjusted net earnings figure. You can defer up to $24,500 as an employee elective deferral, regardless of income. Then calculate the employer profit-sharing contribution at up to 25 percent of adjusted net earnings. Add the two amounts together, respecting the $72,000 combined ceiling. If you are 50 or older, you can add a catch-up contribution on top of that ceiling.

Contribution comparison: SEP IRA vs Solo 401k

At $180,000 of net self-employment income, a SEP IRA allows roughly $33,500 in employer contributions, while a Solo 401k allows the same profit-sharing amount plus a $24,500 employee deferral, totaling approximately $58,000. Add an $8,000 catch-up contribution for those 50 or older and the Solo 401k reaches roughly $66,000, nearly double the SEP limit at the same income. The table below compares the two plans across every dimension that matters.

The comparison reveals why the Solo 401k dominates at typical self-employed income levels. The employee deferral layer does not depend on earnings: whether you make $80,000 or $280,000, you can defer the full $24,500. The SEP IRA has no equivalent mechanism, so its total contribution is always a fraction of income until you reach the level where 25 percent of adjusted earnings equals or exceeds $72,000.

The Roth option, loan provisions, and catch-up eligibility further widen the gap. If any of those features matter to your planning, the Solo 401k is the only vehicle that offers them. The SEP IRA wins on simplicity: no plan document, no annual filing, and the ability to establish and fund the plan as late as your extended filing deadline.

Side-by-side comparison of SEP IRA and Solo 401k features for self-employed individuals in 2026.

FeatureSEP IRASolo 401k
Employee deferralNot availableUp to $24,500 in 2026
Employer contributionUp to 25% of adjusted net earningsUp to 25% of adjusted net earnings
Total contribution limit$72,000 (employer only)$72,000 (employee + employer combined)
Catch-up (age 50+)Not available$8,000 additional in 2026
Super catch-up (age 60-63)Not available$11,250 additional under SECURE 2.0
Roth contributionsNot availableAvailable via designated Roth sub-account
Participant loansNot permittedUp to $50,000 or 50% of balance
Establishment deadlineExtended filing deadline (Oct 15 for sole props)December 31 of the tax year
Annual filing requirementNoneForm 5500-EZ if assets exceed $250,000
Source: IRS Publication 560 and IRS guidance on one-participant 401k plans.
Part two.
When each plan wins

Why the Solo 401k usually wins on total savings

The Solo 401k advantage comes from the employee deferral layer. A self-employed individual earning $180,000 can defer $24,500 as an employee contribution and add roughly $33,500 as an employer profit-sharing contribution, for a combined $58,000. A SEP IRA at the same income allows only the employer contribution, roughly $33,500. The gap is $24,500 at any income level where the SEP cannot yet reach $72,000.

The breakeven point is approximately $290,000 in net self-employment earnings. At that level, 25 percent of adjusted net earnings equals roughly $72,000, so both plans hit the same ceiling. Below that income, the Solo 401k shelters more because it stacks the deferral on top of the profit-sharing contribution. Above that income, the two plans offer identical contribution capacity, and the SEP IRA's simpler administration becomes a genuine advantage.

For self-employed individuals over 50, the Solo 401k advantage widens further. Catch-up contributions add $8,000 on top of the $72,000 ceiling, bringing the potential total to $80,000. For those age 60 through 63, the SECURE 2.0 super catch-up raises the additional amount to $11,250, for a potential total of $83,250. The SEP IRA has no catch-up provision at any age.

The tax savings compound over time. If you shelter an extra $24,500 annually at a 35 percent marginal rate, you defer roughly $8,575 in federal taxes each year. Over a 15-year career as a solo practitioner, that difference grows to more than $128,000 in deferred taxes before accounting for investment growth. The Solo 401k is not marginally better; it is structurally superior for most self-employed earners.

When a SEP IRA still makes sense

A SEP IRA can be established and funded as late as the extended tax-filing deadline, making it the only realistic option for a business owner who reaches April without a plan in place. If you realize in March that you owe a large tax bill, you can open a SEP IRA, contribute up to 25 percent of your adjusted net earnings, and reduce your taxable income for the prior year. A Solo 401k cannot be established retroactively; it must exist by December 31 of the tax year.

The SEP IRA also requires no annual Form 5500 filing regardless of asset size, and no nondiscrimination testing. For someone who values minimal paperwork over maximum contributions, the SEP is a defensible choice. The administrative gap is real: Form 5500-EZ is only two pages, but it is an annual obligation that carries penalties for late or missed filings.

Already maxing a W-2 401k. If you have a day job with a 401k and you also run a side business, the SEP IRA offers a clean employer-only contribution without aggregation headaches. Your employee deferrals are already maxed at the day job, so the Solo 401k's deferral layer adds nothing. In this scenario, both plans allow the same employer profit-sharing contribution, and the SEP IRA's simpler structure wins.

Variable or uncertain income. The SEP IRA's percentage-of-income formula scales down gracefully in lean years. You can contribute anywhere from zero to 25 percent of adjusted net earnings, with no mandatory contribution. The Solo 401k offers the same flexibility on the employer side, but the December 31 establishment deadline requires a decision before you know your full-year income. If your earnings fluctuate dramatically, the SEP IRA's later deadline provides valuable optionality.

Part three.
Features that separate the two plans

Case study: Marcus shelters $66,000 with a Solo 401k

Marcus is a 52-year-old freelance software developer earning $180,000 in net self-employment income. He has no employees and no W-2 job. He wants to defer as much income as possible from federal taxes and is deciding between a SEP IRA and a Solo 401k for the 2026 tax year.

Under a SEP IRA, Marcus can contribute 25 percent of his adjusted net earnings, roughly $33,500 after accounting for the self-employment tax deduction. Under a Solo 401k, he can contribute $24,500 as an employee deferral, $33,500 as an employer profit-sharing contribution, and an additional $8,000 catch-up contribution because he is over 50. His Solo 401k total is approximately $66,000.

The difference is $32,500 in additional tax-deferred savings. At Marcus's 35 percent marginal federal rate, that shelters roughly $11,375 in federal taxes for a single year. Over a decade of similar earnings, the Solo 401k's advantage compounds to more than $100,000 in deferred taxes before investment growth.

Marcus opens a Solo 401k with a low-cost brokerage that provides a free plan document. He elects the Roth sub-account for his $24,500 employee deferral, reasoning that his tax rate in retirement may be similar to today. He makes the $33,500 employer contribution and the $8,000 catch-up contribution as pre-tax, maximizing his current-year deduction. The total cost of administration is one Form 5500-EZ filing per year once his balance exceeds $250,000.

Case Study
Marcus · Self-employed · Freelance Software Developer · $180K net income · Age 52

Marcus runs a solo freelance practice as a software developer, earning $180,000 in net self-employment income annually. He has no employees and no W-2 income from another employer. At 52, he qualifies for catch-up contributions and wants to maximize his retirement savings before reaching his sixties.

Under a SEP IRA, Marcus would contribute roughly $33,500, representing 25 percent of his adjusted net earnings. Under a Solo 401k, he contributes $24,500 as an employee deferral, adds $33,500 in employer profit-sharing, and tops off with an $8,000 catch-up contribution for a total of approximately $66,000. The Solo 401k shelters nearly $32,500 more than the SEP, saving him roughly $11,000 in federal taxes at his 35 percent bracket.

Marcus elects the Roth option for his employee deferral, building a tax-free bucket alongside his pre-tax employer contributions. He also values the loan provision: if a client pays late and cash flow tightens, he can borrow up to $50,000 from his own account rather than carrying credit card debt.

Roth, loans, and catch-up: features the SEP cannot offer

A Solo 401k can include a designated Roth sub-account, allowing after-tax contributions that grow and distribute tax-free if you meet the qualified distribution rules. SEP IRAs cannot accept Roth contributions under any circumstances. If you expect to be in a higher tax bracket in retirement, or if you want tax diversification across accounts, the Solo 401k Roth option provides flexibility the SEP cannot match.

Solo 401k plans also permit participant loans of up to $50,000 or 50 percent of the vested balance, whichever is less. You repay the loan with interest to your own account, typically over five years, though plans may allow longer repayment periods for primary residence purchases. SEP IRAs prohibit loans entirely; any distribution before age 59½ triggers income tax plus a 10 percent early withdrawal penalty unless an exception applies.

Catch-up contributions. Participants age 50 or older can contribute an additional $8,000 in 2026 on top of the $72,000 combined limit, raising the ceiling to $80,000. For those age 60 through 63, the SECURE 2.0 super catch-up provision increases the additional amount to $11,250, for a potential total of $83,250. The SEP IRA has no catch-up mechanism: whether you are 35 or 63, your maximum contribution is 25 percent of adjusted net earnings, capped at $72,000.

Contribution timing flexibility. Both plans allow contributions up to the extended filing deadline, typically October 15 for sole proprietors. The difference is establishment: a SEP IRA can be created and funded on the same day, even in October, while a Solo 401k must exist by December 31 of the tax year you want to contribute for. Once the Solo 401k is established, you have the same extended deadline to make actual contributions.

The Solo 401k shelters nearly $32,500 more than the SEP at $180,000 in income, saving roughly $11,000 in federal taxes at the 35 percent bracket.
Earning $150,000 or more from self-employment and unsure which plan maximizes your tax deferral?Talk to an advisor
Part four.
Administration and edge cases

Administrative burden and filing requirements

A SEP IRA is established by completing IRS Form 5305-SEP or a prototype document from a financial institution. The form is not filed with the IRS; you simply keep it in your records. There is no annual filing requirement for the employer, regardless of plan assets. Administration consists of making contributions and receiving custodian statements.

A Solo 401k requires a written plan document, which most brokerages provide at no cost. The document defines contribution formulas, vesting schedules, and distribution rules. Once plan assets exceed $250,000, you must file Form 5500-EZ annually with the IRS. The form is two pages and takes most self-employed individuals less than an hour to complete, but it carries a penalty of up to $250 per day for late filing, capped at $150,000.

Provider selection matters. Not all brokerages offer Solo 401k plans with full feature sets. If you want the Roth sub-account, verify that the provider supports designated Roth contributions. If you want loan provisions, confirm the plan document includes them and that the custodian can process loan disbursements. Some providers charge annual fees; others waive fees but limit investment options. Compare Fidelity, Schwab, Vanguard, and E*TRADE before opening.

The administrative gap between SEP and Solo 401k is real but manageable. If the Solo 401k shelters an extra $24,500 annually and saves you $8,000 in taxes, the hour spent on Form 5500-EZ is among the highest-return hours you will work all year. Complexity is not a reason to leave money on the table; it is a cost to factor into the decision.

Edge cases: switching plans, having both, and spouse employment

You can maintain both a SEP IRA and a Solo 401k, but employer contributions across all defined contribution plans you sponsor share the same Section 415(c) limit of $72,000 in 2026. In practice, running both plans adds administrative overhead without increasing total contribution capacity. Most self-employed individuals choose one or the other and simplify.

Switching from SEP to Solo 401k. If you already have a SEP IRA and want the Solo 401k's deferral layer, you can open a Solo 401k and roll the SEP balance into it without triggering taxes. The rollover moves assets from one tax-deferred account to another. Going forward, you make contributions only to the Solo 401k. You can leave the SEP open but dormant if you prefer to avoid the paperwork of closing it.

Spouse as employee. If your spouse works in the business and receives reasonable compensation, both of you can participate in a Solo 401k. Each spouse can make the full $24,500 employee deferral, and employer profit-sharing contributions are calculated separately for each participant. A married couple running a business together can potentially shelter well over $100,000 combined, depending on income and ages.

Mid-year income changes. If your income drops mid-year, you can reduce or skip contributions to either plan. Neither the SEP IRA nor the Solo 401k requires a fixed contribution percentage. Flexibility is built into both structures. The key difference is that Solo 401k employee deferrals must come from actual compensation earned that year, so you cannot defer $24,500 if your net earnings are only $20,000.

Decisions like this are easier with a fiduciary in the room

SEP IRA or Solo 401k? Roth or pre-tax? The right answer depends on your income trajectory, existing accounts, and tax situation. We are a fee-only RIA with no commissions and no product sales. Talk to an advisor and run the numbers on your actual situation.

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FAQ

Frequently asked questions.

Can I contribute to both a SEP IRA and a Solo 401k?

You can maintain both plans, but employer contributions across all defined contribution plans you sponsor share the same Section 415(c) limit of $72,000 in 2026. The employee deferral in a Solo 401k is separate from employer contributions, so you could theoretically defer $24,500 in a Solo 401k and make employer contributions to a SEP IRA, as long as combined employer contributions across all plans stay within the limit. In practice, most self-employed individuals choose one plan to simplify administration and avoid tracking contributions across multiple accounts.

What is the Solo 401k contribution limit for 2026?

The Solo 401k limit for 2026 is $24,500 in employee elective deferrals plus up to 25 percent of net self-employment earnings as an employer profit-sharing contribution. The combined total cannot exceed $72,000 under Section 415(c). Participants age 50 or older can add $8,000 in catch-up contributions on top of the $72,000 ceiling, bringing the potential total to $80,000. Those age 60 through 63 can add $11,250 under the SECURE 2.0 super catch-up provision, for a potential total of $83,250.

What is the SEP IRA contribution limit for 2026?

The SEP IRA contribution limit for 2026 is the lesser of 25 percent of net self-employment compensation or $72,000. Unlike a Solo 401k, the SEP IRA has no employee deferral layer and no catch-up contribution provision at any age. At incomes below roughly $290,000, the SEP allows less total contribution than a Solo 401k because it cannot stack an employee deferral on top of the employer profit-sharing contribution. The SEP IRA reaches its $72,000 ceiling only when adjusted net earnings exceed approximately $290,000.

When is the deadline to set up a SEP IRA or Solo 401k?

A SEP IRA can be established and funded as late as the extended filing deadline for your business tax return, typically October 15 for sole proprietors who file an extension. A Solo 401k must be established by December 31 of the tax year, though contributions can be made until the extended filing deadline. If you reach January without a retirement plan in place, the SEP IRA is your only option for the prior tax year. This deadline difference is often the deciding factor for late planners who discover their tax liability after year-end.

Can I take a loan from a SEP IRA or Solo 401k?

Solo 401k plans permit participant loans of up to $50,000 or 50 percent of the vested balance, whichever is less. You repay the loan with interest to your own account, typically over five years. SEP IRAs do not allow loans under any circumstances; any distribution before age 59½ triggers income tax plus a 10 percent early withdrawal penalty unless a specific exception applies. If access to plan assets before retirement is important to your planning, the Solo 401k is the only option that provides it without triggering taxes and penalties.

Does a Solo 401k offer a Roth option?

Yes. A Solo 401k can include a designated Roth sub-account, allowing after-tax contributions that grow and distribute tax-free if you meet the qualified distribution rules. The employee deferral portion, catch-up contributions, and even employer contributions under SECURE 2.0 provisions can all be designated as Roth. SEP IRAs cannot accept Roth contributions. If you expect to be in a higher tax bracket in retirement or want tax diversification across pre-tax and after-tax accounts, the Solo 401k Roth option provides flexibility the SEP cannot match.

How do I calculate my SEP IRA contribution as a self-employed person?

Start with your net self-employment income from Schedule SE. Subtract half of your self-employment tax to arrive at adjusted net earnings. Multiply the result by 25 percent. The product is your maximum SEP contribution, capped at $72,000. IRS Publication 560 includes a rate table and deduction worksheet that accounts for the circular calculation, since the contribution itself reduces the compensation base used to compute the limit. The effective contribution rate on net Schedule C income is approximately 20 percent once you work through the math.

Sources
Footnotes
  1. 1. Section 415(c) of the Internal Revenue Code sets the annual additions limit for defined contribution plans at $72,000 for 2026.
  2. 2. IRS Notice 2025-67 establishes the 2026 catch-up contribution limit at $8,000 for participants age 50 or older, with an enhanced $11,250 limit for ages 60-63 under SECURE 2.0.
  3. 3. SEP IRA contributions are limited to 25 percent of net self-employment compensation after the deduction for self-employment tax, as detailed in IRS Publication 560.
  4. 4. One-participant plans with assets exceeding $250,000 at the end of the plan year must file Form 5500-EZ annually with the IRS.

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