SEP-IRA vs. Solo 401(k): Which Retirement Plan Fits You If You're Self-Employed?

If you work for yourself and have no employees other than a spouse, a Solo 401(k) usually lets you put away more money than a SEP-IRA at the same income. That's because it adds an "employee" contribution of up to $24,500 for 2026 on top of the same employer contribution a SEP allows. A SEP-IRA is simpler, and you can open it as late as your tax filing deadline, including extensions. For 2026, both plans top out at $72,000 in total contributions, not counting catch-up contributions. Below is a side-by-side comparison, the deadlines, what changes when you hire, and a worked example with real math.

The short version

• Pick a Solo 401(k) if you want to save as much as you can (especially if your profit is under roughly $300,000), you're 50 or older and want catch-up contributions, you want a Roth option for your own deferrals, or you'd like the option to borrow from the plan.
• Pick a SEP-IRA if you want the least paperwork, you're deciding after the year is already over, or you have (or will soon have) employees you'd have to cover anyway.

How each plan works

A SEP-IRA (Simplified Employee Pension) is a traditional IRA that receives employer contributions. As a self-employed person, you're your own employer. You can contribute up to 25% of compensation, but for a sole proprietor that works out to about 20% of your net self-employment earnings once you account for the self-employment tax deduction. If your SEP-IRA provider allows it, the same account can also take your regular IRA contributions.

A Solo 401(k) (the IRS calls it a one-participant 401(k)) is a regular 401(k) that covers only you, or you and your spouse. You wear two hats:

1. Employee: you can defer up to 100% of your earned income, up to $24,500 for 2026.
2. Employer: you can add a profit-sharing contribution, using the same roughly-20%-of-net-earnings math as a SEP.

The employer bucket is the same in both plans; the employee bucket is why the Solo 401(k) wins at most income levels.

SEP-IRA vs. Solo 401(k): side by side (2026)

2026 contribution limits

These are the 2026 figures the IRS has published:

A few details that trip people up:

• For a sole proprietor or single-member LLC, your "compensation" is your net profit minus half of your self-employment tax and minus your own contribution. The IRS has a rate table for this in Publication 560. The shortcut is about 20% of (net profit minus half of SE tax). Only income from the business that sponsors the plan counts.
• For an S corporation owner, contributions are based on your W-2 salary from the S corp, not your total profit. A very low salary saves payroll tax but also shrinks how much you can put in.
• If you own more than one business, the limits are generally figured across all the businesses you control, as if they were one employer. Two plans don't double your limit, and employees of a business you control can affect whether your plan is really "solo."

Deadlines to set up and fund (for the 2026 tax year)

SEP-IRA: set up and fund by your return due date, including extensions. For a 2026 sole proprietor return, that's April 15, 2027, or October 15, 2027 with an extension. For an S corporation, it's March 15, 2027, or September 15, 2027 with an extension.

Solo 401(k) - Employee deferrals: the deferral election generally has to be made by December 31, 2026, and the money can go in by your filing deadline, including extensions. If you run an S corp, your deferrals come out of your 2026 paychecks. - New plan after year-end: a sole proprietor with no employees can adopt a brand-new 401(k) after the year ends, as long as it's in place by the original filing deadline (April 15, 2027 for 2026). Extensions don't stretch this one. - Employer contribution: by your tax return due date, including extensions.

My rule of thumb: if a Solo 401(k) is on your list, open it by December. Providers take time to set up accounts, and a December 31 deadline is a lot calmer than an April scramble.

Worked example: what the tax savings actually look like

This is an example with made-up numbers, not a real client.

Alex is 45, single, a sole proprietor with no employees, and has $120,000 of net profit on Schedule C for 2026. No other income. Standard deduction. I'm using the 2026 federal brackets and standard deduction ($16,100) and including the qualified business income (QBI) deduction. No state tax.

Step 1: How much can Alex put in?

• SEP-IRA maximum: $22,304
• Solo 401(k) maximum: $24,500 employee deferral + $22,304 employer = $46,804

Step 2: What does it do to Alex's federal income tax?

Two things worth noticing:

1. The savings are less than "contribution × tax bracket." Alex is in the 22% bracket, but the SEP saves about 17.6% of what went in. That's because retirement contributions also shrink the QBI deduction. Most online calculators skip this. It doesn't make the plans a bad deal; Alex still keeps every dollar contributed, just inside a retirement account. It just means you should plan with realistic numbers.
2. Retirement contributions don't reduce self-employment tax. Alex owes the same $16,955 of SE tax either way. If SE tax is the thing bothering you, that's a separate conversation (often about whether an S corp election makes sense).

If Alex chose Roth deferrals in the Solo 401(k) instead, the upfront savings would be smaller, but qualified withdrawals later would be tax-free. That trade-off depends on where you think your tax rate is headed.

What happens when you hire

• SEP-IRA: once an employee is 21 or older, has worked for you in at least 3 of the last 5 years, and earned at least $800 from you in 2026, you generally have to contribute for them too. Employee contributions are generally the same percentage of pay you give yourself.
• Solo 401(k): once you have an eligible employee who isn't your spouse, the plan isn't "solo" anymore. Employees who are 21+ with a year of service (generally 1,000 hours) have to be allowed in, and long-term part-timers who work 500+ hours in 2 consecutive years have to be allowed to make deferrals. The plan then needs the testing a regular 401(k) has.

If you expect to hire, check your plan before the first hire, not after.

Does a SEP or Solo 401(k) affect my IRA deduction?

Yes. If you contribute to either plan for the year, you're treated as covered by a workplace retirement plan. That means your traditional IRA deduction phases out at higher incomes. For 2026, the phase-out is $81,000 to $91,000 of modified AGI if you're single, and $129,000 to $149,000 if you're married filing jointly. Roth IRA contributions don't depend on plan coverage, only on income limits ($153,000 to $168,000 single; $242,000 to $252,000 married filing jointly for 2026).

What if I contribute too much?

It's fixable, but the clock matters:

• Too much in employee deferrals (often from a day-job 401(k) plus a Solo 401(k)): tell the plan by April 15 of the following year so it can pay out the excess plus earnings. Miss that date and the excess can be taxed twice.
• Too much in a SEP-IRA: take out the excess plus earnings by your tax filing deadline, including extensions. If you don't, a 6% excise tax applies each year it stays in the account.
• Too much employer money in a Solo 401(k) (more than the plan or the law allows): that's a plan error, and the IRS has correction programs for it. Don't just let it ride.

What about a SIMPLE IRA?

A SIMPLE IRA is the other common small-business plan, but it's usually built for businesses with employees. For 2026 it allows $17,000 of employee deferrals ($4,000 catch-up at 50+, $5,250 at ages 60–63) plus a required employer match or 2% contribution. It generally has to be set up by October 1 and has to be your only plan. Withdrawals in the first 2 years can face a 25% additional tax. For a true solo business, a Solo 401(k) usually allows more.

Which plan fits whom: my CPA take

A Solo 401(k) usually fits you if: - You have no employees, or only your spouse. - You want to save more than about 20% of your profit. - You're 50+ and want catch-up contributions. - You want a Roth option for your own deferrals, or the ability to take a plan loan.

A SEP-IRA usually fits you if: - Your income is lumpy and you want to decide after you see the year's numbers. - It's already past December 31 and you want a deduction for last year. - You also have a 401(k) at a day job and already use your full $24,500 deferral there. The Solo 401(k)'s big advantage mostly disappears, so the SEP's simplicity can win.

The best plan is the one you'll actually fund. Pick a contribution you can sustain without draining the cash you need for taxes in April.

Can I contribute to a SEP-IRA or Solo 401(k) if I have a 401(k) at work?

Yes. You can set up a plan for your self-employment income even if you have a plan at your W-2 job. The catch is the $24,500 employee deferral limit, which covers all your 401(k)-type plans combined. The employer side of a SEP or Solo 401(k) is figured on your self-employment income alone.

Is it too late to open a SEP-IRA for last year?

Usually not. You can set up and fund a SEP-IRA for a year as late as your tax filing deadline for that year, including extensions. If you file an extension, you have until the extended deadline to make the deposit, even if you file the return earlier.

Where do these contributions show up on my tax return?

For a sole proprietor, your own contributions are deducted on Schedule 1 of Form 1040, not on Schedule C. That's why they lower your income tax but not your self-employment tax. Roth contributions aren't deducted at all; they go in after tax and count toward the same limits.

Before you decide

This is general information, not advice for your own tax situation. The right plan depends on your income, your age, whether you have or plan to have employees, and what else you own. If you'd like help figuring out which plan fits you and how much you can realistically put in, reach out through my contact form and I'll take a look. If you're brand new to working for yourself, you may also find what to do first after you quit your job to go self-employed helpful.