SEP IRA vs. Solo 401(k): Which Is Right for You?

What Is a SEP IRA?

A SEP IRA (Simplified Employee Pension IRA) is a retirement account designed specifically for self-employed people and small business owners. “Simplified” is the operative word: it's one of the easiest retirement accounts to set up and maintain, with minimal paperwork and, in most cases, no annual filing requirement.

Contributions come only from the business (you, as the employer), there's no employee salary-deferral option.

You can contribute up to 25% of your net self-employment earnings, up to a total dollar cap set each year by the IRS.

If you have eligible employees, you generally must contribute the same percentage of pay for them as you do for yourself.

There's no Roth version of a SEP IRA, contributions are pre-tax only, which lowers your taxable income today.

What Is a Solo 401(k)?

A Solo 401(k), also called an Individual 401(k) or Solo-k, is built for business owners who have no employees other than a spouse. What makes it powerful is that you contribute in two roles at once: as the “employee” and as the “employer.”

As the employee, you can defer a portion of your income, up to the annual IRS elective-deferral limit, plus an additional catch-up amount if you're 50 or older.

As the employer, you can also contribute up to 25% of your net self-employment earnings.

Many Solo 401(k) plans offer a Roth option for the employee-deferral portion, letting you contribute after-tax dollars that grow completely tax-free.

Some providers let you borrow against your balance, up to the lesser of $50,000 or 50% of your account value.

Once your balance grows past $250,000, you'll need to file a short annual report (IRS Form 5500-EZ).

SEP IRA vs. Solo 401(k): Contribution Limits Compared

Both accounts share the same overall combined contribution ceiling set by the IRS each year, for 2026, that total is $72,000 (or more if you qualify for catch-up contributions). Where they differ is how you get there.

With a SEP IRA, every dollar you contribute comes from the “employer” side of the equation: roughly 20% of your net self-employment earnings after adjusting for self-employment tax. There's no separate employee-deferral bucket, so your total contribution is entirely a function of your business profit.

With a Solo 401(k), you get two contribution buckets stacked on top of each other. In 2026, you can defer up to $24,500 of your income as the “employee” (plus an extra $8,000 if you're 50 or older), and then add employer profit-sharing contributions of up to 25% of net earnings on top of that, all the way up to the same $72,000 combined cap (or $80,000 with the catch-up).

Which Plan Lets You Save More at Your Income Level?

This is where the two plans really diverge, especially for people who aren't yet earning six figures. Imagine you have $60,000 in net self-employment income. With a SEP IRA, your contribution is capped at roughly 20% of that amount, around $11,000 to $12,000. With a Solo 401(k), you could defer the full employee amount ($24,500, capped by your earnings) and then add an employer contribution on top, often pushing your total well past $30,000 for the same income.

That gap is the single biggest reason many self-employed people with moderate income prefer a Solo 401(k): the employee-deferral bucket lets you save significantly more without needing sky-high profits. At higher income levels, where the 25% employer contribution alone can reach the combined cap, the two plans tend to converge and the decision comes down to features rather than dollar limits.

Other Key Differences Worth Knowing

Roth option: Solo 401(k) plans often allow Roth employee contributions; SEP IRAs do not.

Loans: Solo 401(k) plans may let you borrow from your own balance; SEP IRAs never allow participant loans.

Administrative simplicity: SEP IRAs typically require less paperwork and no annual filing in most cases, while larger Solo 401(k) balances require Form 5500-EZ.

Employees: SEP IRAs require you to contribute the same percentage for eligible employees, which can get expensive as you grow. Solo 401(k) plans only work if you truly have no employees other than a spouse.

Setup timing: SEP IRAs can be opened and funded right up until your tax filing deadline; Solo 401(k) accounts generally must be opened by December 31 of the tax year, even though employer contributions can be made later.

How to Decide Which Plan Is Right for You

Consider a SEP IRA if you want the simplest possible setup, you might hire employees in the near future and want to plan around that now, or you'd rather make a flexible, lump-sum contribution in good years without much ongoing administration.

Consider a Solo 401(k) if you're the only person in your business (or you and a spouse), you want to maximize how much you can save at a moderate income level, you value having a Roth option, or you like the flexibility of being able to borrow from the plan in a pinch.

How to Open a SEP IRA or Solo 401(k)

Getting started with either account follows a similar path. First, choose a brokerage or financial institution that offers the plan you want, most major providers offer both. Next, complete the plan's adoption agreement, which formally establishes the account under your business. Then fund the account: for a SEP IRA, you can typically wait until your tax filing deadline, including extensions, to make your contribution for the prior year. For a Solo 401(k), the account itself generally needs to be opened by December 31, though you have until your filing deadline to actually deposit certain contributions.

Whichever you choose, the most important step is simply starting. Even modest, consistent contributions compound significantly over a career, and the tax savings alone can make a noticeable difference in your annual bill.

A Closer Look: Comparing the Two Plans at Different Income Levels

Numbers make this decision much easier to picture. Say your business nets $40,000 in self-employment earnings for the year. Under a SEP IRA, your contribution ceiling comes out to roughly 20% of that figure, somewhere around $7,000 to $8,000, since the formula accounts for the self-employment tax adjustment. Under a Solo 401(k), you could defer a much larger share of that same $40,000 as the “employee,” since the employee-deferral limit is separate from the 25% employer formula, potentially allowing you to shelter close to your entire net earnings, up to the deferral limit.

Now compare that to a business netting $150,000. At that level, 25% of net earnings on the employer side alone gets you much closer to the combined annual cap, so the extra employee-deferral bucket in a Solo 401(k) adds a smaller marginal benefit. This is why the SEP IRA vs. Solo 401(k) decision tends to matter most for businesses in their earlier, lower-revenue years, exactly when a Solo 401(k)'s structure can meaningfully outpace a SEP IRA's.

It's also worth remembering that these figures shift slightly every year as the IRS adjusts contribution limits for inflation, so it's worth double-checking the current year's numbers with your plan provider or a tax professional before finalizing your contribution.

What About a Traditional or Roth IRA on the Side?

Some self-employed savers wonder whether they can simply skip a SEP IRA or Solo 401(k) and just max out a Traditional or Roth IRA instead. The honest answer: you can absolutely contribute to an IRA alongside a SEP IRA or Solo 401(k), but IRA contribution limits are much lower, a small fraction of what these dedicated self-employed plans allow. For most people earning a meaningful income from their business, an IRA alone won't provide nearly enough tax-advantaged savings capacity, which is exactly why SEP IRAs and Solo 401(k)s exist in the first place. Think of an IRA as a nice supplement, not a replacement, for your primary retirement plan.

Frequently Asked Questions