From the Vault: How to Choose Between a SEP-IRA and a Solo 401(k)

What's the best retirement plan for self-employed people?

This post was originally published in October 2024. Contribution limits have been updated to reflect 2026 figures.

One of the best perks of being self-employed is the ability to choose the retirement plan you want. Many W2 employees get stuck with bad 401(k)s with expensive investments, complicated match structures or missing features like Roth options, loans or the ability to max out the account every year.

As a solopreneur, freelancer, contractor, what have you, you can pick the retirement plan that fits your goals, desired contribution amount, desired contribution type and just about any purpose you want.

While there are lots of ways to save for retirement, most business owners will gravitate toward two options: the SEP-IRA and the solo 401(k). Which one is the best fit depends mostly on the type of contributions you want to make, your income and your appetite for complexity.

With that last item in mind, let’s start with the simplest retirement plan for the self-employed, the SEP-IRA.

SEP-IRA

The Simplified Employee Pension Individual Retirement Arrangement, or SEP-IRA, is a common retirement plan available for business owners and their employees. Their main benefit, as the name suggests, is simplicity. The setup process is straightforward and can take a matter of minutes. There’s almost no required maintenance on the account or complicated tax forms business owners need to file. SEP-IRAs are also ideal if you grow out of your solo business and start hiring employees.

Only employers can make SEP-IRA contributions. This means that if you’re a W2 employee with an employer-provided SEP-IRA, you can’t make contributions of your own. Your employer can contribute up to 25% of your pay up to an annual limit. None of this is an issue for solo entrepreneurs, who are their own employers. This contrasts with a 401(k), which allows employees to contribute with optional employer matching contributions.

The maximum contribution for 2026 is $72,000, but the actual amount you can contribute is your net income (gross revenue minus expenses) minus half of your self-employment taxes multiplied by 20%. For example, a business owner with $100,000 of net income could contribute $18,587. In order to hit the $72,000 limit, you would need to earn more than $375,000.

The problem for many solo business owners is that it’s hard to predict what their net income will be by the end of the year. To make your personal maximum contribution, you need exact figures that you won’t have until the year is over. This makes SEP-IRAs fairly complicated to figure out in practice and why business owners tend to make lump-sum contributions before they file their taxes.

Up until 2022, you could only make pre-tax contributions to a SEP-IRA. With the passage of the SECURE Act 2.0, you can now make Roth contributions, but many providers have been slow to allow them. In place of direct Roth contributions, you have long been able to convert SEP-IRA contributions to a Roth IRA by paying any taxes owed on the amount.

Solo 401(k)

The solo 401(k), also known as the individual 401(k) or a one-participant 401(k), is just like a normal 401(k) except for businesses that have a single employee other than a spouse. They offer many more features than the SEP-IRA and allow for better customization to suit your needs.

The most crucial difference between a SEP-IRA and a solo 401(k) is the ability to make employee contributions. The maximum employee contribution limit for 2026 is $24,500, while the overall limit is $72,000, just like the SEP-IRA. This means that a business owner can contribute $24,500 as an employee and an additional $47,500 as an employer.

While the employer contribution works based on the same calculation SEP-IRA contributions use, the employee contribution is much more straightforward. You can contribute 100% of your net income up to the limit.

Unlike the SEP-IRA, catch-up contributions are allowed. These apply to the employee portion of the contributions, allowing for those 50 and older to make an additional $8,000 contribution for a total of $80,000. More recent rules allow those 60 to 63 to make a “super” catch-up contribution of $11,250 for a total of $83,250.

Other benefits include the ability to make Roth contributions directly and borrow up to $50,000 from the plan.

The biggest downside to a solo 401(k) is the paperwork. For one, there is a longer setup process that often involves sending forms through the mail. Then, once your account reaches $250,000, reporting requirements become stricter. You will need to file Form 5500-EZ every year once your account hits this amount, with strict penalties for failure to complete this step.

Why the Solo 401(k) Beats the SEP-IRA

For most people running their own business, at least in the beginning, a solo 401(k) will effectively let you contribute more money. Let’s break down the math of how this works. Here’s a great calculator for determining solo 401(k) and SEP-IRA contributions.

Input your profit from the business in the “Net income” box, meaning gross revenue earned minus expenses. So if your business earned $120,000 of revenue and expenses totaled $20,000, your net income would be $100,000. The calculator subtracts half your self-employment taxes for you and spits out a number. You can play with the numbers yourself to see how the solo 401(k) lets you contribute more despite technically having the same overall limit (aside from catch-up contributions).

If you earn $100,000, the maximum you can contribute to a SEP-IRA is $18,587, while you can contribute $43,087 to a solo 401(k). If you earn $200,000, you can contribute $37,176 to a SEP-IRA and $61,677 to a solo 401(k). While you only need to earn about $250,000 to max out a solo 401(k), you would need about $375,000 to max out a SEP-IRA.

The ability to make employee contributions makes it easier to max out a solo 401(k) faster than a SEP-IRA because you can make them first and then move on to employer contributions. If you don’t foresee yourself contributing more than the employee maximum and you don’t want to worry about making enough money for your desired contribution, a solo 401(k) is a no-brainer. The one situation where it doesn’t matter which one you choose (in terms of contributions) is if you already make enough to max out a SEP-IRA.

Which to Choose

So who should choose a SEP-IRA and who should choose a solo 401(k)?

Choose a SEP-IRA if you:

• Won’t contribute more than 20% of your net income

• Want to max out contributions and easily make $375,000 or more

• Prefer simple online setup and no reporting requirements

• Think you may hire employees in the future

Choose a solo 401(k) if you:

• Have a more modest income

• Want to fill the employee bucket first

• Want to easily make Roth contributions

• Want to make catch-up contributions

• Need to take out loans

SEP-IRAs are ultimately simpler to maintain, but might not be the simplest when it comes to figuring out how much you can contribute. If you want a straightforward way to contribute up to $24,500 (plus whatever catch-up contribution you may qualify for), choose a solo 401(k). A solo 401(k) is also going to make maxing out contributions more doable because it requires less income than a SEP-IRA.

SEP-IRAs are easy to set up, and you can find them just about anywhere that already offers an IRA. While providers are a bit harder to find, solo 401(k)s offer the most flexibility, features and customization. You can select an off-the-shelf plan from the likes of Fidelity and Schwab, or you can build a custom plan that suits your needs.

If you only care to make pre-tax contributions and your business income is easily over $375,000 every year, you can comfortably choose a SEP-IRA and keep it simple. But most people will find that the ability to make those employee contributions to a solo 401(k) without figuring out net earnings calculations that may not be available until the end of the year will make life a lot easier.

SEP-IRAs and solo 401(k)s can both be great plans for the right business owner, but there is a substantial difference between them that you should look at before selecting one.