Freelancers, consultants, and small business owners without employees have two dominant retirement account options: the SEP IRA and the Solo 401k. Both allow substantial contributions well above what a W-2 employee can put into a standard IRA — but they differ meaningfully in how much you can contribute at various income levels, whether you can go Roth, and how complex they are to manage. Picking the wrong one doesn't cost you money directly, but it can cost you years of missed tax savings.
What changed in 2026
- Solo 401k limits increased — the combined limit is approximately $70,000 in 2026 (up from prior years), with a catch-up of ~$7,500 for those 50 and older.
- SEP IRA limits also increased — capped at 25% of compensation up to the same ~$70,000 ceiling, but employer-side only, which means lower real contributions at moderate incomes.
- SEP IRA Roth option still absent — despite legislative discussion, SEP IRAs remain traditional (pre-tax) only. Solo 401k holds the Roth advantage.
- SECURE 2.0 eliminated RMDs for Roth 401k — Roth Solo 401k balances no longer require minimum distributions, making the Roth Solo 401k even more attractive for long-term compounding.
Head-to-head comparison
| Feature |
SEP IRA |
Solo 401k |
| Contribution type |
Employer only (25% of net SE income) |
Employee + employer (two buckets) |
| 2026 max contribution |
~$70,000 (at ~$280k+ income) |
~$70,000 (at ~$200k+ income) |
| Roth option |
No |
Yes |
| Eligibility |
Self-employed or S-corp owner |
Self-employed, no full-time non-spouse employees |
| Plan setup deadline |
Tax filing deadline (incl. extensions) |
December 31 of contribution year |
| Administrative burden |
Very low |
Low to moderate |
| Form 5500 required |
No |
Yes, once assets exceed $250,000 |
| Loans allowed |
No |
Yes (up to 50% of balance or $50k) |
| Employees allowed |
Yes, but must cover eligible employees |
No full-time non-spouse employees |
The contribution gap: where Solo 401k dominates
This table shows the approximate maximum contribution under each account at various net self-employment income levels:
| Net SE income |
SEP IRA max |
Solo 401k max |
Solo 401k advantage |
| $30,000 |
~$5,600 |
~$29,100 |
+$23,500 |
| $50,000 |
~$9,300 |
~$33,000 |
+$23,700 |
| $80,000 |
~$14,900 |
~$38,400 |
+$23,500 |
| $120,000 |
~$22,300 |
~$45,800 |
+$23,500 |
| $200,000+ |
~$46,500 |
~$70,000 |
Converging |
| $280,000+ |
~$70,000 |
~$70,000 |
Same at limit |
The gap exists because the Solo 401k's employee contribution ($23,500) is a flat amount, not a percentage of income. The SEP IRA is purely percentage-based (effectively ~20% of net SE income). At lower incomes, the flat employee contribution is the difference.
When SEP IRA makes sense
- You have employees and want the same plan to cover them (Solo 401k is only for owner + spouse)
- You want maximum simplicity — no December 31 deadline, no 5500 form
- You earn more than ~$280,000 and the contribution amounts converge
- You already have a traditional IRA and pro-rata rule concerns make the Roth option irrelevant
When Solo 401k makes sense
- Your net SE income is under $200,000 and you want to maximize contributions
- You want a Roth bucket for tax-free retirement income
- You want loan access from your retirement savings
- You're planning a mega backdoor Roth strategy
- You have no full-time employees beyond your spouse
The pro-rata rule and SEP IRA gotcha
If you have any pre-tax traditional IRA or SEP IRA balance, it affects backdoor Roth IRA conversions due to the pro-rata rule. All pre-tax IRA money (across all your IRAs) is counted when you attempt a Roth conversion — creating a taxable event. Rolling a SEP IRA into a Solo 401k can clear this problem, since 401k money is excluded from the pro-rata calculation.
How to decide
- Have employees other than your spouse? → SEP IRA or a full SIMPLE/401k plan.
- Want Roth contributions? → Solo 401k, only option.
- Earning under $150k net SE income? → Solo 401k wins on contribution room.
- Want lowest complexity and no deadlines? → SEP IRA is easier to set up any time before your filing deadline.
- Both are solid options — if you're paralyzed by the choice, the Solo 401k beats the SEP IRA for most self-employed people under $200k.
Common mistakes
Keeping both a SEP IRA and a Solo 401k open. It's not prohibited for most, but it adds complexity and has no benefit unless you're rolling the SEP into the Solo 401k.
Forgetting the December 31 plan establishment deadline for Solo 401k. You can contribute after December 31 (up to the filing deadline), but the plan must be opened by December 31 of the tax year.
Contributing to a SEP IRA when you want to do backdoor Roth. Pre-tax IRA balances trigger the pro-rata rule. Consider rolling to a 401k or choosing a Solo 401k from the start.
What to skip
- SIMPLE IRA for solo operators — lower limits ($16,500 employee) than Solo 401k, no Roth option, and a 2-year early withdrawal penalty window. No advantage for a solo business.
- Leaving retirement dollars on the table — any self-employment income, even from a side hustle alongside W-2 employment, can support a Solo 401k. The opportunity cost of not using one is real.
FAQ
Can I have both a SEP IRA and a Solo 401k?
Technically possible, but the total contribution across both is still limited by the annual cap. Most people pick one to simplify.
I'm an S-corp owner — does this change things?
Yes. S-corp owners take a salary (W-2), so contributions are based on W-2 compensation, not net SE income. The mechanics differ and the math often favors a Solo 401k.
What if I open a Solo 401k but later hire employees?
You'll need to convert to a full 401k plan that covers eligible employees or terminate the Solo 401k and switch to a SEP or SIMPLE. Plan ahead.
Can I deduct SEP IRA contributions on my taxes?
Yes — SEP IRA contributions are deducted on Schedule C (sole proprietor) or Schedule 1, reducing your AGI directly.
Where to go next