SEP-IRA or Solo 401(k)? Retirement plans for the self-employed

Both let you save far more than a regular IRA. Here’s how the 2026 limits work, what each plan lets you contribute at different income levels, and the deadlines that matter.

Why this decision matters

When you work for yourself, nobody sets up a retirement plan for you. The upside is that the plans available to you can shelter far more income than a traditional or Roth IRA. The two most common choices are the SEP-IRA and the Solo 401(k), sometimes called a one-participant 401(k).

Both reduce taxable income when you contribute pre-tax. The differences are in how contributions are calculated, how much you can put in at a given income, what paperwork is involved, and who else in the business has to be covered.

The 2026 numbers

These limits are adjusted most years. For 2026, the IRS has published:

401(k) employee deferral limit: $24,500
Catch-up deferral for age 50 and over: $8,000
Higher catch-up for those who turn 60, 61, 62 or 63 during the year: $11,250 (in place of the $8,000)
Overall limit on contributions to a defined contribution plan, including SEP-IRAs: $72,000, not counting catch-ups
Maximum compensation that can be counted: $360,000
Traditional and Roth IRA limit: $7,500, plus a $1,100 catch-up at 50 and over

SEP-IRA: simple and flexible

A SEP-IRA is funded only with employer contributions. If you’re self-employed, you are the employer. Contributions can be up to 25% of compensation, capped at $72,000 for 2026. There is no separate employee deferral and no catch-up contribution.

For a sole proprietor or single-member LLC, “compensation” is net earnings from self-employment after subtracting half of self-employment tax and the contribution itself. Because the contribution reduces its own base, the effective rate works out to about 20% of net self-employment earnings after the half-SE-tax deduction, not 25%. IRS Publication 560 has a rate table and worksheet for this.

A SEP is easy to open, has almost no ongoing administration, and contributions are discretionary each year. The catch: if you have eligible employees, you must contribute the same percentage of pay for them as for yourself.

Because SEP contributions are entirely discretionary, you can contribute the maximum in a strong year and nothing in a lean one. That makes a SEP a practical fallback for owners who don’t know their profit until after the books close in February or March.

Solo 401(k): two layers of contributions

A Solo 401(k) lets you contribute in two roles. As the employee, you can defer up to $24,500 for 2026 (plus catch-up if eligible), and many plans allow those deferrals to be Roth. As the employer, you can add a profit-sharing contribution on the same basis as a SEP: about 20% of net self-employment earnings for a sole proprietor, or 25% of W-2 wages for an S corp owner. Combined, the two layers can’t exceed $72,000, plus catch-ups.

Because the employee deferral isn’t tied to a percentage of pay, a Solo 401(k) usually allows much more at low and moderate income. It’s only for businesses with no employees other than the owners and their spouses. A spouse who earns income from the business can participate and make their own deferrals.

Worked examples

These use 2026 limits and round the math. They’re illustrations, not calculations for your return.

Sole proprietor, $150,000 Schedule C profit. Half of self-employment tax is about $10,600, leaving roughly $139,400. A SEP allows about $27,900 (20%). A Solo 401(k) allows the same $27,900 employer contribution plus a $24,500 deferral — about $52,400.
Sole proprietor, $300,000 profit. Half of SE tax is about $15,500 (the Social Security portion stops at the $184,500 wage base). A SEP allows about $56,900. A Solo 401(k) would compute to about $81,400 but is capped at $72,000; at age 50 or over, catch-up takes it to $80,000.
S corp owner paying herself a $100,000 W-2 salary. Contributions are based only on W-2 wages, not K-1 profit. A SEP allows $25,000 (25% of wages). A Solo 401(k) allows $25,000 plus a $24,500 deferral, for $49,500.

Deadlines to open and fund

The two plans differ most on timing, and recent law changes added flexibility for decisions made after year-end.

SEP-IRA: can be set up and funded as late as the due date of your return, including extensions. For a 2026 sole proprietor return on extension, that’s October 15, 2027.
Solo 401(k) employer (profit-sharing) contributions: due by the return due date, including extensions.
Solo 401(k) employee deferrals: must be elected by December 31, then can be deposited by the filing deadline, including extensions. S corp owners generally run deferrals through payroll, so plan them before the final payroll of the year.
New Solo 401(k) after year-end: a sole proprietor with no employees can adopt a 401(k) plan for the prior year as long as it’s adopted by the filing deadline, not counting extensions (April 15, 2027 for 2026).

Rules that trip people up

The $24,500 deferral limit is per person, shared across every 401(k) and 403(b) you participate in. If you max out deferrals at a W-2 job, your Solo 401(k) is limited to the employer contribution.
Hiring changes everything. Once you have employees who meet eligibility rules, a Solo 401(k) is no longer an option and a SEP must cover them at the same percentage.
A SEP-IRA balance counts as an IRA for the pro-rata rule, which can make a backdoor Roth contribution partly taxable. A Solo 401(k) balance does not, and many plans accept roll-ins of pre-tax IRA money.
Beginning in 2026, catch-up contributions for employees whose prior-year FICA wages from the plan sponsor exceeded $150,000 must be made as Roth. A sole proprietor with no W-2 wages from the business isn’t subject to this rule; an S corp owner with a high salary may be.
Contributions are deducted in different places: a sole proprietor’s own contributions go on Schedule 1 of Form 1040 and don’t reduce self-employment tax, while an S corp’s contributions are a business deduction.

Paperwork after you open a plan

A SEP-IRA has no annual IRS filing. A Solo 401(k) is generally required to file Form 5500-EZ once total assets across all of your one-participant plans reach $250,000 at year-end, due by July 31 for a calendar-year plan. The penalty for missing it can be $250 a day, up to $150,000 a year, so it’s worth a calendar reminder.

Solo 401(k) providers also vary: some don’t allow Roth deferrals, loans or roll-ins. Check the plan document, not just the account type.

A reasonable default

If you have no employees and income below roughly $300,000, a Solo 401(k) usually allows more for similar effort and keeps backdoor Roth planning clean. A SEP-IRA makes sense when simplicity matters most, when you’re deciding after the April deadline, or when your target contribution fits comfortably inside it.

If you have employees, an S corporation, a W-2 job with its own 401(k), or you’re weighing a cash balance plan on top, run the numbers before choosing. A Tally Tax planner would typically model both plans against your actual profit or salary and confirm the deadlines before year-end.

Frequently asked questions

Can I have both a SEP-IRA and a Solo 401(k)?

It’s possible in some situations, but it rarely adds room. Employer contributions for the same business count toward the same $72,000 overall limit and the same deduction limits, and the paperwork doubles. For most owners, one plan per business is simpler and gives up nothing.

Is it too late to open a plan for 2026?

Not necessarily. A SEP-IRA can be opened and funded up to the extended due date of your 2026 return. A sole proprietor can also adopt a new Solo 401(k) for 2026 by the April 2027 filing deadline, without extensions. If you already have a 401(k), elect your 2026 deferrals by December 31.

Should my Solo 401(k) deferrals be Roth or pre-tax?

Pre-tax saves tax now; Roth saves tax later. High earners in their peak years often lean pre-tax, while owners in a lower-income year may prefer Roth. Employer profit-sharing contributions are generally pre-tax unless the plan permits Roth employer contributions.

Does a SEP-IRA contribution reduce my self-employment tax?

No. For a sole proprietor, SEP and Solo 401(k) contributions reduce income tax but not self-employment tax, which is figured before the retirement deduction. For an S corp, employer contributions aren’t subject to FICA, but salary deferrals and the salary itself still are.

Can my spouse contribute to my Solo 401(k)?

Yes, if your spouse actually works in the business and earns compensation from it. They can make their own deferrals and receive employer contributions, which can roughly double what a household can shelter through one business.

What if I want to save more than $72,000 a year?

Owners with high, stable income sometimes add a defined benefit or cash balance plan alongside a 401(k). These can allow much larger deductible contributions, especially for owners in their 50s and 60s, but they require annual actuarial work and fixed funding commitments. They’re worth modeling only when the extra deduction clearly outweighs the cost and inflexibility.

This guide is general information, not tax, legal or accounting advice for your situation. Rules and inflation-adjusted figures change; confirm current-year details with a credentialed professional before acting.