SEP IRA vs Solo 401(k): which lets the self-employed save more

If you work for yourself in the United States, the two retirement accounts you will be steered toward are the SEP IRA and the Solo 401(k). Both are tax-advantaged, both are built for people with no employer plan, and — as of 2026 — both share the exact same ceiling: $72,000 in total contributions. That shared cap is what makes the comparison confusing. If the maximum is identical, why choose one over the other?

The answer is in how each plan fills that bucket. A SEP IRA is funded entirely from the “employer” side: as a self-employed person you wear both hats, and the employer can put in up to 25% of compensation. A Solo 401(k) splits the contribution into two parts — an employee salary deferral plus the same 25% employer share — and the employee deferral is a flat dollar amount that does not shrink just because your profit is modest.

For most self-employed people earning below roughly $200,000 of net income, the Solo 401(k) lets you save more, because it stacks a $24,500 employee deferral (2026) on top of the employer contribution, while the SEP IRA is limited to the employer piece alone. The two plans only converge at high income, where the 25% employer share by itself is large enough to approach the $72,000 cap.

The 2026 numbers, and where they come from

The IRS announced the 2026 figures in Notice 2025-67 on November 13, 2025. The overall limit on contributions to any defined-contribution plan — the Section 415(c) cap — rose to $72,000, up from $70,000 in 2025. That single number is the ceiling for both the SEP IRA and the Solo 401(k).

Within the Solo 401(k), the employee elective deferral limit for 2026 is $24,500 (up from $23,500 in 2025). Savers aged 50 and over can add an $8,000 catch-up; those aged 60 to 63 get an enhanced catch-up of $11,250 under SECURE 2.0. The compensation that can be counted for the employer contribution is capped at $360,000.

The SEP IRA has no employee deferral and no catch-up at all. It is simply 25% of compensation, subject to the same $72,000 total cap. There is one wrinkle that trips up almost everyone the first time, covered next.

The “25%” that is really 20% for sole proprietors

A SEP brochure will tell you the limit is 25% of compensation. For a self-employed person who has not formed an S-corp, that figure quietly becomes about 20% of net self-employment income — and the IRS confirms this in Publication 560.

The reason is circular. Your contribution is a business deduction, which lowers your net earnings, which lowers the base the 25% is applied to. To break the loop, the IRS uses a reduced rate: for a stated 25% contribution rate, the reduced rate is 25% ÷ 1.25, which equals 20%. You also first subtract the deduction for one-half of your self-employment tax before applying that 20%. The net effect: a sole proprietor’s real SEP ceiling is roughly a fifth of net self-employment income, not a quarter.

This same 20%-effective employer contribution applies to the Solo 401(k) as well — the employer portion of a Solo 401(k) is computed identically to a SEP. The difference is purely the employee deferral the Solo 401(k) adds on top.

A worked example — $80,000 of net self-employment income

Take a freelancer with $80,000 of net self-employment income (net Schedule C profit, before the retirement contribution). Walk through both plans using rounded numbers; your own figure should come from the self-employment tax math on your actual return.

First, the shared step. The deduction for half of self-employment tax is roughly $5,650 on $80,000 of profit, leaving about $74,350 of “net earnings from self-employment.” Apply the 20% reduced rate: 20% × $74,350 ≈ $14,870.

SEP IRA: that is the whole story. The freelancer can contribute about $14,870 — the employer share and nothing more.

Solo 401(k): the freelancer first makes the $24,500 employee deferral (a flat amount, paid out of compensation, not a percentage of profit). Then the same employer contribution of about $14,870 goes in on top. Total: roughly $39,370 — more than two and a half times what the SEP allows at the identical income, and comfortably under the $72,000 ceiling.

The gap is the entire argument for the Solo 401(k) at low-to-mid income. The employee deferral does not care that the business only cleared $80,000; it is the same $24,500 a high earner would defer. The SEP, lacking that deferral, can only ever reach 20% of whatever the business made.

Now push the income higher. At about $290,000 of net self-employment income, the 20% employer calculation alone produces roughly $58,000, and adding the $24,500 deferral would breach the $72,000 cap — so the deferral gets partially crowded out, and the two plans land in the same place. That crossover is why the Solo 401(k)‘s headline advantage is a low-and-middle-income phenomenon, not a universal one.

The Roth question — and what SECURE 2.0 actually changed

For years the SEP IRA had no Roth option at all: every dollar went in pre-tax. The SECURE 2.0 Act of 2022 changed the law, authorizing Roth SEP and Roth SIMPLE contributions. So a Roth SEP is now legal.

Legal is not the same as available. Building Roth recordkeeping into SEP accounts took custodians time, and as of 2026 many providers still offer traditional SEPs only. The Solo 401(k), by contrast, has had a designated Roth bucket for the employee deferral for years, and SECURE 2.0 additionally permits the employer profit-sharing contribution to be designated as Roth where the plan document allows it. If building tax-free Roth retirement savings is part of your plan, the Solo 401(k) is the more reliable vehicle today — but confirm in writing that your specific provider supports Roth before you open either account, because the statute permits it without compelling any custodian to offer it.

One 2026 footnote worth flagging: SECURE 2.0’s new rule requiring catch-up contributions to be made as Roth applies to people whose prior-year wages from the sponsoring employer exceeded $150,000. That is keyed to W-2 wages, so a sole proprietor with no W-2 generally is not caught by it — but a self-employed owner who has elected S-corp treatment and pays themselves a W-2 salary above the threshold should plan for catch-ups to be Roth-only.

Paperwork and employees — the two practical tiebreakers

When the contribution math is a wash (high income) or close, two operational differences decide it.

Paperwork. A SEP IRA has essentially none — no annual IRS filing, ever, regardless of balance. A Solo 401(k) is also filing-free until the plan’s year-end balance crosses $250,000, at which point you must file Form 5500-EZ annually. It is a short information return rather than a tax bill, but it is a recurring deadline a SEP never imposes. For a small or new account, this difference is theoretical; for a Solo 401(k) that has compounded past a quarter-million dollars, it is a real (if minor) chore.

Employees. This is the hard dividing line. A Solo 401(k) is only for an owner-only business — you, and optionally a spouse who works in the business. The moment you hire an eligible non-spouse employee, the plan can no longer be a “solo” plan and must become a conventional 401(k). A SEP IRA can cover employees, but the rule cuts the other way: you must contribute the same percentage of pay for every eligible worker that you contribute for yourself. Put in 20% for your own account and you owe 20% of each eligible employee’s pay too. For a true one-person shop the Solo 401(k) is cleaner; for an owner who already has staff and wants a low-maintenance plan, the SEP’s simplicity can outweigh its lower personal ceiling.

A final cash-flow note: a SEP can be opened and funded up to the business’s tax-filing deadline (including extensions), which makes it the classic “I forgot to plan” account you can still fund after year-end. A Solo 401(k) must generally be established by year-end to make employee deferrals for that year, though SECURE 2.0 relaxed the setup deadline for the employer portion. If you are also juggling quarterly estimated taxes, coordinate the contribution timing with those payments so a large deduction does not leave you over-withheld.

Sources

• IRS — Notice 2025-67, 2026 cost-of-living adjustments for retirement plans (Section 415(c) limit $72,000; 401(k) deferral $24,500): https://www.irs.gov/pub/irs-drop/n-25-67.pdf
• IRS — 401(k) limit increases to $24,500 for 2026, IRA limit increases to $7,500: https://www.irs.gov/newsroom/401k-limit-increases-to-24500-for-2026-ira-limit-up-to-7500
• IRS — Self-employed individuals: calculating your own retirement plan contribution and deduction (the 25%→20% reduced rate): https://www.irs.gov/retirement-plans/self-employed-individuals-calculating-your-own-retirement-plan-contribution-and-deduction
• IRS — Publication 560, Retirement Plans for Small Business (rate table and worksheets): https://www.irs.gov/publications/p560
• IRS — COLA increases for dollar limitations on benefits and contributions: https://www.irs.gov/retirement-plans/cola-increases-for-dollar-limitations-on-benefits-and-contributions