SEP IRA vs Solo 401(k) for the self-employed

How do they compare?

Both plans can be held at most brokerages, and a Solo 401(k) can hold the same investments as an IRA.

If you have a job with a 401(k) as well, your employee deferral limit is shared across both plans.

Which allows more on the same income?

For a sole proprietor under 50 with $80,000 of net profit, net self-employment earnings after the deduction for half of self-employment tax are about $74,350. A SEP allows about 20% of that, roughly $14,870. A Solo 401(k) allows the same employer contribution plus a $24,500 deferral, about $39,370. At very high incomes, both reach the $72,000 ceiling.

How do you choose?

1. Check for employees

   Any eligible employees rule out a Solo 401(k) and must be included in a SEP.

2. Compare the amounts

   At moderate profits, the Solo 401(k) usually allows more.

3. Check the timing

   A SEP can be opened and funded up to the return due date, including extensions.

4. Decide on Roth

   Roth deferrals are easier in a Solo 401(k).

What about catch-up contributions?

Savers aged 50 or over can make extra catch-up deferrals in a Solo 401(k), and a higher catch-up applies at ages 60 to 63, under the 2026 limits the IRS publishes each year. A SEP IRA has no catch-up, because it accepts only employer contributions. For older owners, this widens the gap in the Solo 401(k)'s favour.

What if you hire employees later?

A Solo 401(k) stops being suitable once you have eligible employees other than a spouse; you then need a plan that covers them, such as a full 401(k) or a SEP with contributions for everyone eligible. With a SEP, the same contribution percentage you give yourself must be given to eligible employees, which can make it expensive for a business with staff.

When must contributions be made?

SEP contributions can be made up to the tax return due date, including extensions, for the previous year. For a Solo 401(k), the plan generally needs to be in place, and employee deferrals elected, by the rules for the year; employer contributions can be made up to the return due date. Newer rules give sole proprietors more time to set up a plan for its first year. Check with the plan provider before year end if you want to make deferrals.

How does it work for S corporation owners?

Contributions are based on W-2 salary, not distributions. Employer contributions are up to 25% of salary, and the Solo 401(k) deferral comes out of salary through payroll. A low salary limits contributions. See S corp owner payroll.

How are contributions deducted?

For sole proprietors and partners, contributions for yourself are deducted on Schedule 1, reducing income tax but not self-employment tax. For S corporations, employer contributions are deducted by the corporation. See year-end tax planning.

Contributions grow tax-deferred, and withdrawals in retirement are taxed as income, except qualified Roth withdrawals. Withdrawals before age 59½ generally carry a 10% additional tax, with some exceptions.

This guide is general information. It is not tax or legal advice for your situation.