Retirement planning
SEP IRA vs Solo 401(k) [2026]
If you're self-employed, retirement is 100% on you — no employer match, no automatic payroll deductions, no HR department reminding you to “max out your 401(k).” The two best vehicles for building retirement wealth as a business owner are the SEP IRA and the Solo 401(k). They look similar on paper. The contribution math is what separates them — especially at lower income levels.
SEP IRA vs Solo 401(k): Head-to-Head
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Best for | Self-employed with employees; simplicity above maximum contributions | Self-employed with NO employees (other than spouse); wants maximum contributions at lower incomes |
| 2026 Max Total Contribution | Lesser of 25% of compensation or $70,000 (estimated, indexed from $69,000 in 2024) | Lesser of 100% of compensation or $70,000 (estimated, indexed from $69,000); total across employee + employer contributions |
| Employee Salary Deferral | Not allowed — employer contributions only | Up to $23,500 in 2026 (indexed); + $7,500 catch-up if age 50+ |
| Employer Contribution | Up to 25% of compensation | Up to 25% of compensation (employer nonelective); can also do matching contributions |
| SE Tax Consideration | Contribution reduces taxable income but NOT self-employment income — you still pay SE tax on the full net earnings | Same — retirement contributions don't reduce SE tax base. SE tax is calculated on Schedule SE before retirement deductions |
| Roth Option | No — SEP IRA contributions are always pre-tax (Traditional) | Yes — employee deferral portion can be Roth (after-tax). Employer contributions are always pre-tax |
| Plan Loans | No — cannot borrow from SEP IRA | Yes — up to $50,000 or 50% of vested balance, whichever is less |
| Setup Deadline | Tax filing deadline including extensions (e.g., October 15 for calendar-year filers) | Must be established by December 31 of the tax year (but contributions can be made until tax filing deadline) |
| Annual Filing | None — no Form 5500 requirement for SEP IRAs | Form 5500-EZ required once plan assets exceed $250,000 |
| Employees Allowed? | Yes — but ALL eligible employees must receive same contribution % (including part-time if criteria met) | No — Solo 401(k) only covers the business owner and their spouse. Having eligible employees disqualifies the plan |
| Withdrawal Rules | 10% penalty before age 59½ (same as Traditional IRA); RMDs start at age 73 (age 75 starting 2033) | 10% penalty before age 59½ (same as 401(k)); RMDs apply same as SEP IRA. Plan termination may trigger special rules |
Where Solo 401(k) Wins: Lower Income Levels
The critical difference: Solo 401(k) gives you an employee deferral up to $23,500 (2026 estimate) that SEP IRA does not. This means at lower incomes, the Solo 401(k) lets you contribute a much larger percentage of your earnings:
Scenario: $60,000 Net Self-Employment Income
SEP IRA
Maximum contribution: 20% of net SE earnings (the effective rate after the self-employment tax adjustment) ≈ $11,150.
That's 18.6% of net income going to retirement.
Solo 401(k)
Employee deferral of $23,500 (100% of compensation for employee portion)
+ Employer contribution of 20% of net SE earnings ≈ $11,150
Total maximum: $34,650 (capped at $60,000 of compensation).
Solo 401(k) allows 3.1× more contributions at this income level.
Scenario: $150,000 Net Self-Employment Income
SEP IRA
Maximum contribution: 20% of net SE earnings ≈ $27,880.
Gap to the $70,000 ceiling: you can't reach it with SEP IRA alone.
Solo 401(k)
Employee deferral of $23,500
+ Employer contribution of 20% ≈ $27,880
Total: $51,380.
Solo 401(k) allows ~84% more contributions. Add $7,500 catch-up if age 50+.
Scenario: $300,000+ Net Self-Employment Income
SEP IRA
25% of compensation up to the annual cap ≈ $70,000.
At high incomes, both plans converge to the same ceiling.
Solo 401(k)
Employee deferral of $23,500 + employer contribution of $46,500 = $70,000.
Both hit the ceiling. Difference at this income: Solo 401(k) offers Roth, loans, and catch-up.
At high incomes, the plans are equivalent for maximum tax deferral — but Solo 401(k) still has better features.
Self-Employment Contribution Rate: Why 20%, Not 25%
The IRS calculates retirement contributions based on “compensation” (for S-Corps) or “net earnings from self-employment” (for sole proprietors and single-member LLCs), which includes a reduction for one-half of self-employment tax:
The formula for sole proprietors:
Step 1: Net self-employment income = Gross business income − business expenses
Step 2: SE tax deduction = Net SE income × 92.35% × 15.3% × 50%
Step 3: Adjusted net earnings (compensation) = Net SE income − SE tax deduction
Step 4: Maximum contribution = Adjusted net earnings × 20% (equivalent to 25% of compensation because the contribution itself reduces compensation)
For S-Corp owners who pay themselves a W-2 salary, the calculation is simpler: 25% of your W-2 wages can go to the employer contribution portion of either plan.
Setup Complexity & Administrative Burden
SEP IRA Setup — Under 30 Minutes
- • Open a SEP IRA account at any major brokerage (Vanguard, Fidelity, Schwab) — usually an online form.
- • Complete IRS Form 5305-SEP (model SEP agreement) — no filing needed, just keep for your records.
- • No annual filing requirement. No Form 5500.
- • No plan document to maintain. No amendments for law changes — the financial institution handles compliance.
- • Employees must be given a copy of the plan document and annual contribution statements.
Solo 401(k) Setup — Plan Document Required
- • Adopt a written plan document — most providers (Fidelity, Vanguard, E*TRADE) provide a pre-approved plan.
- • Must be established (signed and dated) by December 31 of the tax year. This is the biggest deadline constraint.
- • Obtain an EIN for the plan (different from your business EIN) if filing Form 5500-EZ.
- • File Form 5500-EZ when plan assets exceed $250,000 (due July 31 of the following year).
- • Must restate (update) the plan document every 6 years to incorporate IRS-required amendments.
- • Plan termination: file final Form 5500-EZ and distribute assets within 12 months.
Warning: The Employee Trap
If you have a Solo 401(k) and hire a W-2 employee (other than your spouse) who meets eligibility requirements (usually age 21 + 1 year of service with 1,000+ hours), your Solo 401(k) isdisqualified — it becomes a regular 401(k) subject to ERISA rules, nondiscrimination testing, and potential penalties. You must either convert to a full 401(k) plan or terminate the Solo 401(k) before the employee becomes eligible. SEP IRA has no such restriction — you simply include eligible employees in contributions.
Model Your Retirement Contributions
The right plan depends on your specific income, business structure, and whether you have employees. Use our calculators to see your exact contribution limits and tax savings:
Frequently asked questions
Can I have both a SEP IRA and a Solo 401(k) at the same time?+
Yes, technically — but it rarely makes sense. The overall contribution limit across all defined contribution plans is $70,000 per taxpayer. Having both plans means double the administrative burden with no extra contribution capacity. The one scenario where it can make sense: if you participate in a SEP IRA through your employer (day job) and also have a Solo 401(k) for your side business — the limits apply per unrelated employer.
I already have a SEP IRA — can I convert it to a Solo 401(k)?+
You can't convert a SEP IRA into a Solo 401(k), but you can roll over your SEP IRA balance into a new Solo 401(k) once the Solo 401(k) is established. Open the Solo 401(k) first (must be by December 31), then initiate a direct trustee-to-trustee rollover of your SEP IRA assets into the new Solo 401(k) account. This is not a taxable event. You can then stop contributing to the SEP IRA and use the Solo 401(k) going forward.
What if I max out a Solo 401(k) and still want to save more?+
You have several options beyond the $70,000 ceiling: (1) Cash Balance / Defined Benefit plan — allows much higher contributions (potentially $200K+) for high-income professionals, but requires actuarial calculations and annual funding commitments. (2) HSA (Health Savings Account) — $4,150 individual / $8,300 family in 2026 if you have a qualifying HDHP. (3) Taxable brokerage account — no tax deduction but unlimited contributions and capital gains treatment. (4) Backdoor Roth IRA — contribute to a Traditional IRA and convert to Roth (requires no existing pre-tax IRA balances to avoid the pro-rata rule).
How are contributions reported on my tax return?+
SEP IRA contributions are reported on Schedule C (as an adjustment to income on line 19 of Schedule 1 if self-employed) or deducted on the business return (Form 1120-S / 1065) if made by the business. Solo 401(k) employee deferrals are reported on Form 1040 Schedule 1 line 16; employer contributions go on Schedule C line 19 (for sole proprietorships). Both reduce your adjusted gross income (AGI) and taxable income — but neither reduces self-employment tax (Schedule SE).
Do I need to make contributions every year?+
No — both plans allow you to skip contributions in any year. SEP IRA contributions are discretionary year by year. Solo 401(k) employee deferrals are also elective annually. There is no minimum funding requirement for either plan. However, in a SEP IRA, if you contribute for yourself, you must also contribute the same percentage for all eligible employees. In a Solo 401(k), the plan document may specify a default employer contribution formula — but you typically retain discretion.