Solo 401(k) vs. SEP IRA: Which Is Better for Business Owners?
The quick answer
For most self-employed people with no employees, a solo 401(k) is better than a SEP IRA because it lets you contribute more at the same income level. Both plans cap total contributions at $72,000 in 2026, but a solo 401(k) adds a $24,500 employee contribution on top of the employer contribution, plus catch-up contributions if you're 50 or older. A SEP IRA is simpler and can make sense if you have employees you plan to cover, or you want the easiest setup.
How do a solo 401(k) and SEP IRA work?
SEP IRA: Only the business contributes, up to 25% of W-2 pay (or about 20% of net self-employment income for sole proprietors), with a maximum of $72,000 in 2026.
Solo 401(k): You contribute in two roles. As the employee, you can defer up to $24,500 of your income in 2026, plus $8,000 if you're 50 or older ($11,250 if you're 60 to 63). As the employer, the business can add the same 25% or 20% contribution as a SEP. Total contributions are capped at $72,000, not counting catch-ups.
The employee contribution is why a solo 401(k) usually allows more savings, especially at lower or moderate income levels.
Example: $100,000 of self-employment income
A 45-year-old sole proprietor earns $100,000 of net self-employment income in 2026.
SEP IRA: About $18,600 (roughly 20% of net earnings after the self-employment tax deduction)
Solo 401(k): About $43,100 ($24,500 employee contribution plus the same $18,600 employer contribution)
Same income, same business, but the solo 401(k) allows more than twice the savings. The gap narrows at very high incomes, where both plans can reach the $72,000 limit.
What are the other differences?
Employees: A solo 401(k) is only for owners with no employees other than a spouse. With a SEP IRA, you must contribute the same percentage for eligible employees.
Roth option: Most solo 401(k)s offer Roth contributions. Roth SEP contributions are now allowed, but not every provider offers them.
Administration: SEP IRAs require almost no paperwork. A solo 401(k) requires filing Form 5500-EZ once plan assets exceed $250,000.
Loans: A solo 401(k) can allow loans. A SEP IRA cannot.
Backdoor Roth IRA: SEP IRA balances can create tax on backdoor Roth conversions. Solo 401(k) balances don't, which matters for high earners.
Which one should you choose?
A solo 401(k) is usually better if you have no employees, want to save as much as possible, want a Roth option, or plan to use the backdoor Roth IRA.
A SEP IRA may be better if you have or plan to hire employees, want the simplest setup, or your income is high enough that the employee contribution adds little.
If you already have a SEP IRA and your situation fits a solo 401(k), switching can be straightforward.
Frequently asked questions (FAQs)
Can I have both a solo 401(k) and a SEP IRA? You can, but employer contributions to both count toward the same $72,000 limit, so it rarely helps.
What is the deadline to open and fund a SEP IRA? You can open and fund a SEP IRA up to your tax filing deadline, including extensions.
Can I contribute to a solo 401(k) if I also have a 401(k) at another job? Yes, but your $24,500 employee contribution limit is shared across all plans.
Get help choosing the right plan
Not sure which retirement plan fits your business, or how much you can save this year? Reliant Wealth Advisory helps business owners build a plan to save more and pay less in taxes.
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About the author
Michael Walstedt, CFA, CFP®, is the founder of Reliant Wealth Advisory, a fee-only fiduciary firm in Hoboken, New Jersey. He helps business owners, executives, and tech professionals in the New York/New Jersey area, as well as nationwide, with financial planning and investment management.
This article is for educational purposes only and is not tax, legal, or investment advice. Tax rules change, and your situation may differ. Consult a qualified tax professional before acting.
