Answer
Solo 401(k) vs SEP IRA: which is better for self-employed?
Short answer
For most high-earning self-employed people, a Solo 401(k) allows larger contributions at the same income level because it combines an employee deferral (up to $23,500 in 2026) with an employer contribution (25% of W-2 compensation for S-corp owners, roughly 20% of net earnings for sole proprietors). A SEP IRA only allows the employer-side contribution. Below about $75,000 in net profit, both plans yield similar contributions. Above that, the Solo 401(k) wins by a wide margin.
Contribution comparison at $150K sole-prop net profit (2026)
SEP IRA
$27,705
Employer contribution only (~20% of net earnings)
- No employee deferral
- Open until October 15 (with extension)
- No Roth option
Solo 401(k)
$51,205
Employee deferral + employer contribution
Employee deferral
$23,500
Employer contribution
$27,705
Solo 401(k) advantage at $150K profit
+$23,500 more
At 32% marginal rate, the Solo 401(k) advantage saves roughly $7,520 more in federal tax this year.
SEP IRA mechanics: employer contribution only. Up to 25% of W-2 compensation for S-corp shareholders, or approximately 20% of net self-employment earnings for sole proprietors (after the SE tax deduction). Capped at $70,000 in 2026. Simple to establish (IRS Form 5305-SEP or a brokerage prototype), no annual filings required unless assets exceed $250,000, contributions can be made up to the tax filing deadline including extensions (October 15).
Solo 401(k) mechanics: two-component structure. Employee deferral up to $23,500 in 2026 ($31,000 if age 50 to 59 or 64 and older, $34,750 if age 60 to 63 under SECURE 2.0), plus employer contribution of 25% of W-2 salary for S-corp owners or approximately 20% of adjusted net earnings for sole proprietors. Combined cap of $70,000 ($77,500 to $83,750 with catch-up). Plan must be established by December 31 of the contribution year, though contributions can be made through the filing deadline.
The crossover math at $150K sole-prop net profit: SEP contribution limit is roughly $30,000 (20% of adjusted net). Solo 401(k) allows $30,000 employer contribution plus $23,500 employee deferral, totaling $53,500. The difference of $23,500 at a 32% marginal rate is $7,520 in additional annual federal tax savings. That difference recurs every year at income above the crossover.
When SEP IRA wins: if you have employees (Solo 401(k) requires no full-time non-spouse employees), if you want maximum simplicity with no annual filings, or if you missed the December 31 plan establishment deadline (SEP can be opened up to the filing deadline, Solo 401(k) cannot). For a one-person business with no employees, SEP wins on simplicity below the crossover income level.
Roth option: many Solo 401(k) providers allow a Roth subaccount for the employee deferral portion. No income phase-out applies to Roth Solo 401(k) contributions, unlike Roth IRA which phases out at $150,000 to $165,000 single in 2026. High earners who are ineligible for direct Roth IRA contributions can still access Roth treatment through the Solo 401(k) without the backdoor IRA structure.
The compounding difference
$23,500 in extra annual contributions, compounded at 7%.
The Solo 401(k) employee deferral that a SEP IRA cannot match. Compounded at a 7% assumed return.
5 years
10 years
15 years
20 years
Illustrative. 7% assumed annual return. Does not include tax-free growth inside Roth if the Roth Solo 401(k) option is used.
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