SEP IRA vs. Solo 401(k): Which Retirement Plan Is Right for the Self-Employed?

If you're self-employed, freelancing, or running a small business with no full-time employees, you have two main options for a tax-advantaged retirement plan that can hold far more than a regular IRA: a SEP IRA and a Solo 401(k). Both let you shelter significant income from taxes, but they work differently — and for most self-employed savers, the difference adds up to thousands of dollars a year in extra contribution room.

What Is a SEP IRA?

A Simplified Employee Pension (SEP) IRA is an employer-funded retirement account. If you're self-employed, "employer" is you — contributions come only from business profits, not from a paycheck deferral. SEP IRAs are popular because they're simple to set up (most brokerages let you open one in minutes) and have almost no ongoing paperwork or annual filing requirements, even at higher balances.

The catch: your contribution is capped at a percentage of your compensation, which matters most if your net self-employment income is modest.

What Is a Solo 401(k)?

A Solo 401(k) (also called an Individual 401(k)) is designed for a business owner with no employees other than a spouse. It lets you contribute in two roles at once: as the "employee" (a salary deferral) and as the "employer" (a profit-sharing contribution). Because the employee deferral doesn't depend on a percentage-of-income formula, a Solo 401(k) often lets you contribute more than a SEP IRA at the same income level — especially if your net income is under roughly $150,000–$200,000.

Most Solo 401(k) providers also allow a Roth option and a loan feature, neither of which a SEP IRA offers.

2026 Contribution Limits

FeatureSEP IRASolo 401(k)
Max total contributionLesser of 25% of compensation or $72,000$72,000 (under 50) / $80,000 (age 50+) / up to $83,250 (age 60–63)
Employee deferral portionNot applicable — employer contribution onlyUp to $24,500 (plus $8,000 catch-up at 50+, or $11,250 for ages 60–63)
Roth optionNoYes, if the plan offers it
Loan featureNoOften yes, up to plan limits
Setup & adminVery simple, minimal paperworkMore setup steps; IRS Form 5500-EZ required once assets exceed $250,000
Compensation cap counted$360,000$360,000

Limits reflect 2026 IRS figures (Notice 2025-67). Actual contribution room depends on your net self-employment income after the deduction for one-half of self-employment tax.

Why a Solo 401(k) Usually Wins at Lower Income Levels

Because a SEP IRA's contribution is capped at 25% of compensation, you need roughly $288,000 in net self-employment income to hit the full $72,000 SEP limit. A Solo 401(k) reaches the same $72,000 cap at a much lower income, because the $24,500 employee deferral doesn't depend on the 25% formula at all — it's available regardless of profit level (as long as you have at least that much in earnings).

In practice, this means a freelancer or consultant earning $80,000–$150,000 a year can typically shelter significantly more in a Solo 401(k) than in a SEP IRA at the same income.

When a SEP IRA Still Makes Sense

  • You want the absolute simplest setup with no annual filing, ever
  • You expect to eventually hire employees and want a plan that's easy to extend to them
  • You're opening the account late in the year and don't want to deal with Solo 401(k) provider paperwork before the deadline

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Frequently Asked Questions

Can I have both a SEP IRA and a Solo 401(k) in the same year?
Generally no for the same self-employment income — you choose one primary plan for that business. You can, however, have a Solo 401(k) for self-employment income while also participating in a separate employer's 401(k) from a day job, subject to the combined employee deferral limit across plans.

Which plan lets me contribute more?
At most income levels under roughly $200,000, a Solo 401(k) allows a higher total contribution than a SEP IRA, because of the flat employee deferral amount on top of the employer contribution.

Do I need special software to run a Solo 401(k)?
No — most major brokerages (Fidelity, Schwab, E*TRADE) offer no-cost Solo 401(k) plans with standard online account management. The only added requirement is filing IRS Form 5500-EZ once plan assets pass $250,000.

Can I convert a SEP IRA to a Solo 401(k) later?
You can open a new Solo 401(k) and stop contributing to the SEP, and in many cases roll the SEP IRA balance into the Solo 401(k) to consolidate accounts — check with your plan provider on the mechanics.

Related reading: What Is a 401(k) and How Does It Work? · What Is a Roth IRA and How Does It Work? · What Is a Roth Conversion and When Does It Actually Make Sense?

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