Solo 401(k) or SEP IRA: which is better for a self-employed owner?

How each plan works

• SEP IRA. Funded by employer contributions only. There is no employee deferral and no catch-up. The limit is 25% of compensation or $72,000 for 2026, whichever is less, counting no more than $360,000 of compensation.
• Solo 401(k). The same employer contribution, plus an employee deferral of up to $24,500 for 2026, or 100% of compensation if less. At 50 or older you can add an $8,000 catch-up, or $11,250 at ages 60 to 63. Everything except the catch-up has to fit under $72,000. It covers only the owner and the owner’s spouse.

For a sole proprietor, compensation means net self-employment earnings after the deduction for half of self-employment tax and after the contribution itself. That is why the 25% works out to 20% of profit after the half self-employment tax deduction. For an S Corporation owner, it is simply 25% of W-2 wages, so the salary you set drives the contribution.

A worked example

Isabella is 45, a sole proprietor with no employees, and has $100,000 of net Schedule C profit in 2026. Here is the most she can put away under each plan.

The employer contribution is the same in both plans. The deferral more than doubles what Isabella can put away. Contributions for yourself are deducted on Form 1040, not on Schedule C, so they lower income tax but not self-employment tax.

The gap shrinks at higher incomes, because both plans run into the same $72,000 limit. Past that point, the Solo 401(k)’s only edge is the catch-up after 50. An S Corporation owner works the same way: on an $80,000 salary, a SEP allows $20,000 and a Solo 401(k) allows $44,500.

Roth options

• Roth deferrals. Many Solo 401(k) plans let you make the employee deferral as a Roth contribution: no deduction now, tax-free later.
• Roth employer contributions. Since the SECURE 2.0 Act, a SEP or 401(k) can let employer contributions go in as Roth, if the plan and the provider offer it. A Roth employer contribution is reported on Form 1099-R and taxed in the year it is made.

Deadlines

• SEP. You can open it and fund it as late as the due date of your return, including extensions. For a 2026 sole proprietor, that is April 15, 2027, or October 15, 2027 on extension.
• Solo 401(k), employer contribution. A new plan adopted after year end, by the extended due date of the return, can take an employer contribution for the prior year.
• Solo 401(k), employee deferral. In a sole proprietor’s first plan year, the plan can be opened and the deferral made up to the original due date of the return, April 15, 2027 for 2026, with no extension. An S Corporation owner’s deferral comes out of salary through payroll, so the plan has to be in place before that payroll runs.

Employees change the answer

A SEP has to cover every employee who is at least 21, has worked for you in at least 3 of the last 5 years and earned at least $800 in 2026, and they get the same percentage of pay you give yourself. A Solo 401(k) is only for a business with no employees other than the owners and their spouses. If you plan to hire, talk to us before you choose.

Paperwork

A SEP generally has no annual IRS filing. A Solo 401(k) files Form 5500-EZ once plan assets are $250,000 or more at year end, counting all of your one-participant plans together. The IRS penalty for filing late is $250 a day, up to $150,000 a year.

How we help

We do not set up retirement plans. Clients open them with their payroll provider or a brokerage such as Fidelity or Schwab. We size the contribution from your actual numbers before the deadline and report it correctly on your return.

This guide is general information based on the law as of the date above, not advice for your situation. Tax rules change, and the right answer depends on your numbers.