Solo 401(k) vs SEP IRA 2026
If you are self-employed, you are your own employer — and that means you get to fund both sides of a retirement plan. The Solo 401(k) does this best, letting you shelter dramatically more than a SEP IRA at the same income. Here is the 2026 math.
Employee deferral
$24,500
Solo 401(k) only, 2026
Employer side
~25%
Profit-sharing (both plans)
Total cap
~$70,000
Per plan, 2026
SEP IRA
Employer only
No employee deferral
The Two Plans at a Glance
- Solo 401(k) — for a business with no employees other than you (and possibly your spouse). You can contribute as employee (up to $24,500 in 2026) plus as employer (a profit-sharing contribution of roughly 25% of compensation).
- SEP IRA — the simpler option. You contribute only the employer side, roughly 25% of compensation. No employee deferral, no catch-up, no Roth option.
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How Much Each Lets You Save
| Plan | Employee deferral | Employer contribution | Total cap |
|---|---|---|---|
| Solo 401(k) | $24,500 | ~25% of compensation | ~$70,000 |
| SEP IRA | — | ~25% of compensation | ~$70,000 |
Both plans cap out around $70,000, but the Solo 401(k) reaches that ceiling at a much lower income because the $24,500 employee deferral is added on top of the employer contribution.
Head-to-Head at Real Incomes
| Net self-employment income | SEP IRA (25%) | Solo 401(k) |
|---|---|---|
| $50,000 | ~$9,300 | ~$33,800 |
| $100,000 | ~$18,600 | ~$43,100 |
| $150,000 | ~$27,900 | ~$52,400 |
Figures are approximate (the exact employer percentage is slightly below 25% after the self-employment tax deduction) and assume a single filer under 50. The pattern is clear: the Solo 401(k) shelters thousands more at every income level.
Which to Choose
- Choose a Solo 401(k) if you want to maximize contributions, have no employees, and can handle a bit more paperwork (an annual Form 5500 once assets exceed $250,000).
- Choose a SEP IRA if you want the simplest possible plan, or if you have employees (SEP rules can cover them too, though a Solo 401(k) cannot).
- Want Roth? A Solo 401(k) can have a Roth employee-deferral option; a SEP IRA cannot.
- Deadline note: a SEP IRA can be opened and funded as late as your tax-filing deadline (including extensions); a Solo 401(k) generally must be established by December 31.
Frequently Asked Questions
Can I have both a Solo 401(k) and a SEP IRA?
You can, but the contribution limits coordinate — you generally cannot double up on the employer contribution across plans. For most solo workers, one well-funded Solo 401(k) is cleaner and shelters more.
Does a Solo 401(k) reduce my self-employment tax?
The employee deferral does not reduce SE tax. The employer profit-sharing portion does reduce your net earnings — and therefore your SE tax — which is one reason it is valuable.
What if I have a day job with a 401(k)?
The $24,500 employee deferral is shared across all your 401(k)s in a year — your day-job 401(k) and Solo 401(k) together cannot exceed it. The employer-side contribution is separate per employer.
Is a SEP IRA better if I hire employees later?
Possibly, because a SEP can cover employees, while a Solo 401(k) must be terminated or restructured once you have eligible employees. If you plan to hire, factor that in.
Sources
- IRS IR-2025-111 — 2026 401(k) employee deferral limit of $24,500.
- IRS — SEP IRA and Solo 401(k) contribution rules and the ~$70,000 total limit.
- IRS Publication 560 — Retirement Plans for Small Business.
Contribution figures are estimates; the exact employer percentage depends on your net earnings calculation. This is informational, not tax advice.