Solo 401(k) vs. SEP-IRA, which is better for the self-employed?

Solo 401(k) or SEP-IRA, which is better?

It depends on income and how much administrative complexity you're willing to take on. At low-to-moderate self-employment income, the Solo 401(k) usually wins on maximum contribution room, because it has a contribution bucket the SEP-IRA doesn't: the employee elective deferral. At very high income, the two can converge, since both are ultimately capped by the same $72,000 (2026) combined-contribution ceiling. If you want the largest number and don't mind a plan document and, eventually, a Form 5500-EZ filing, the Solo 401(k) is generally the stronger choice. If you want the least paperwork and are fine with a smaller number, the SEP-IRA is the simpler one.

What's the core structural difference between the two?

A Solo 401(k) has two separate contribution sources: the owner, wearing an "employee" hat, can defer part of their own compensation, and the business, wearing an "employer" hat, can also make a profit-sharing contribution. A SEP-IRA (Simplified Employee Pension) has only one source: the employer contribution. There is no employee deferral bucket in a SEP-IRA at all. That single difference is the reason the two plans produce different maximum contributions at the same income.

Why does a Solo 401(k) let you contribute more than a SEP-IRA?

Because the employee elective deferral is available regardless of profit level, on top of the employer piece. A SEP-IRA has only the employer contribution, roughly 20% to 25% of compensation depending on how it's calculated, so a lower earner maxes out at a much smaller dollar figure. A Solo 401(k) lets that same owner add the full $24,500 (2026) deferral first, then still add the employer contribution on top, up to the shared $72,000 ceiling. At high income, both plans are eventually capped by the same 415(c) limit (the section of the tax code, IRC 415(c), that sets the total annual addition ceiling for a defined contribution plan), so the gap narrows. At low-to-moderate income, the gap is large.

What are the 2026 numbers for each?

Both plans are subject to the same IRS annual limits for 2026, from Notice 2025-67. The difference is which of those limits each plan actually uses.

Source: IRS Notice 2025-67, "2026 Amounts Relating to Retirement Plans and IRAs"; IRS "One-Participant 401(k) Plans"; IRS Publication 560.

For the full 2026 limit breakdown, including how the catch-up and super catch-up work, see Solo 401(k) contribution limits for 2026. For how the Solo 401(k)'s dual-role structure works in the first place, see what a Solo 401(k) is and who qualifies.

Can I have a SEP-IRA if I have employees?

Yes, but it generally must cover them on the same terms as the owner. A SEP-IRA has to extend to every eligible employee, and IRS rules require the contribution to bear a uniform relationship to compensation, meaning the owner can't contribute 25% for themselves and a smaller percentage for staff. That makes a SEP expensive fast once a business has several eligible employees, because the same percentage applied to their pay is a real cash cost, not just a paper allocation. A Solo 401(k) has the identical problem in substance (a plan can't stay "solo" once it has to cover employees), but the trigger point is the same: the moment a common-law employee meets the plan's eligibility requirements, both plan types stop being simple one-person arrangements.

Multiple businesses complicate this further. If your businesses form a controlled group or affiliated service group under the tax code, the IRS treats them as a single employer for coverage purposes, so an employee at one business can force coverage obligations at another, commonly-owned business even if that one has no staff of its own. This applies to both a Solo 401(k) and a SEP-IRA. See Solo 401(k) rules when you own more than one business for the ownership thresholds and the traps that catch owners off guard, including how a spouse's separate business can be pulled into the same controlled group.

Can a Solo 401(k) or SEP-IRA be Roth?

A Solo 401(k) can offer a designated Roth option for the elective deferral piece, if the plan document includes it. That's a feature the plan provider has to build in, not something automatic. A SEP-IRA is traditionally pre-tax only. SECURE 2.0, the 2022 retirement law, added a Roth SEP option, but it's newer and many custodians haven't built support for it yet, so check with the specific provider before assuming it's available.

Can I take a loan from a Solo 401(k) or a SEP-IRA?

A Solo 401(k) can generally allow participant loans if the plan document permits them, the same as a workplace 401(k). A SEP-IRA cannot offer loans at all, because it's structured as an IRA (Individual Retirement Account), and the tax code doesn't permit loans from any IRA. Taking money out of a SEP-IRA before retirement means a distribution, with ordinary income tax and, before age 59 and a half, typically a 10% early withdrawal penalty.

Is a Solo 401(k) more complicated than a SEP-IRA?

Yes, somewhat. A Solo 401(k) requires a written plan document, and once combined assets across all your one-participant plans exceed $250,000 at plan-year end, you must file Form 5500-EZ with the IRS each year. A SEP-IRA has no annual filing requirement at any asset level and is generally simpler to set up through a brokerage with a short adoption form. Neither plan is complicated to open. The ongoing difference is the 5500-EZ threshold and the fact that a Solo 401(k) plan document needs to be kept current with law changes, which a SEP-IRA's boilerplate IRS model form largely avoids.

When is a SEP-IRA actually the better choice?

A SEP-IRA tends to make more sense when simplicity matters more than maximizing the dollar amount, when a business already has, or expects to soon have, eligible employees it's prepared to cover at a uniform percentage, or when the owner just wants a no-maintenance account without a plan document or a future 5500-EZ threshold to track. It's also a reasonable choice for someone who isn't sure their self-employment income will be high enough, or steady enough, for the extra complexity of a Solo 401(k) to pay off. The tradeoff is direct: less paperwork, in exchange for giving up the employee deferral bucket that usually lets a Solo 401(k) reach a bigger total at the same income.

Worked example: the same income, two plans

Take a sole proprietor with $150,000 in net Schedule C profit, under age 50, using 2026 limits.

1. SE-tax base: $150,000 x 92.35% = $138,525 (the 92.35% figure is used only to compute the SE tax).
2. Self-employment tax on that amount, roughly $138,525 x 15.3% = $21,194 (actual SE tax should be computed on Schedule SE).
3. Deduction for one-half of SE tax: about $10,597.
4. Contribution base (IRS Pub 560): net profit minus half the SE tax, $150,000 - $10,597 = $139,403 (net profit, not the 92.35% figure).
5. Employer contribution at the maximum reduced rate for a sole proprietor, 20%: $139,403 x 20% = about $27,881. This is the same formula for both plan types, since both cap the self-employed employer contribution the same way.

SEP-IRA total contribution: about $27,881. That's the entire contribution, since a SEP-IRA has no separate deferral bucket.

Solo 401(k) total contribution: about $52,381. That's the same $27,881 employer piece, plus the full $24,500 employee elective deferral, which is available regardless of the 20%/25% employer-piece math.

At this income, the Solo 401(k) allows roughly double the SEP-IRA's contribution, and both totals sit comfortably under the $72,000 combined 415(c) ceiling and the $360,000 compensation cap for 2026.

The flat truth

The Solo 401(k) wins on maximum contribution room at low-to-moderate self-employment income for one specific, mechanical reason: the employee deferral bucket. A SEP-IRA has to earn its way to a comparable dollar contribution through the employer formula alone, with no separate deferral to add on top. The SEP's real edge is administrative simplicity, no plan document to maintain and no Form 5500-EZ threshold to track, and it scales cleanly the moment a business actually has eligible employees to cover uniformly. That's also, not coincidentally, close to the exact scenario where a Solo 401(k)'s core premise, no eligible common-law employees, stops applying anyway.