Self-employed retirement
Solo 401(k) vs SEP IRA: which saves you more?
Both plans use pre-tax contributions to reduce your taxable income, but they differ in structure. The SEP IRA allows only employer-style contributions (up to 25% of net SE income). The solo 401(k) adds an employee deferral on top (up to $24,500 for 2026), which makes it dramatically more powerful at moderate income levels.
| Net SE income | SEP IRA max | Solo 401(k) max | Solo advantage |
|---|---|---|---|
| $50,000 | ~$9,294 | ~$33,794 | +$24,500 |
| $80,000 | ~$14,871 | ~$39,371 | +$24,500 |
| $150,000 | ~$27,883 | ~$52,383 | +$24,500 |
| $300,000+ | $72,000 | $72,000 | $0 (both at cap) |
25% employer contribution is on net SE income after deducting half of SE tax. Solo 401(k) adds $24,500 employee deferral ($32,000 if 50+).
Questions
Self-employed retirement FAQ
What is the difference between a solo 401(k) and a SEP IRA?
Both are retirement plans for self-employed individuals. The key difference is the solo 401(k) allows both employee deferrals (up to $24,500 in 2026) and employer profit-sharing contributions (up to 25% of net self-employment income), while a SEP IRA allows only employer contributions (up to 25% of net SE income). For most self-employed people earning under $150,000, the solo 401(k) allows significantly higher total contributions.
Which plan lets me contribute more?
At lower income levels, the solo 401(k) wins by a wide margin because of the employee deferral component. A self-employed person with $60,000 net income can put away about $35,400 in a solo 401(k) versus about $11,100 in a SEP IRA. The gap narrows at higher incomes and converges near the combined limit.
Can I have both a solo 401(k) and a SEP IRA?
Technically yes, but contributions to both count toward the same combined limit. There is rarely a practical reason to maintain both. Most self-employed individuals choose one plan. If you want Roth contributions, the solo 401(k) is the only option of the two.
Does a SEP IRA have a Roth option?
Starting in 2023 under the SECURE 2.0 Act, SEP IRAs can accept Roth contributions. However, not all custodians have implemented this option yet. The solo 401(k) has offered a designated Roth option for longer and has wider custodian support for it.
How is net self-employment income calculated for contributions?
Net SE income for retirement plan purposes is your Schedule C profit minus the deductible half of self-employment tax. For example, if your Schedule C shows $100,000 profit, your net SE income after the SE tax deduction is approximately $92,935. The 25% employer contribution is based on this reduced number.
Is the solo 401(k) harder to set up?
Slightly. A SEP IRA can be opened and funded in minutes with a single form (IRS Form 5305-SEP). A solo 401(k) requires adopting a plan document, though many brokerages offer free pre-approved plans. Once over $250,000 in plan assets, the solo 401(k) requires an annual Form 5500-EZ filing. A SEP IRA never requires one.
- Sources: IRS Rev. Proc. 2025-32 (2026 deferral $24,500, combined $72,000) · IRC Section 404 (25% employer limit) · IRC Section 1401 (SE tax 15.3%).
- 🔄 Last updated July 2026 · Tax year 2026
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