For most self-employed people with no employees, a Solo 401(k) beats a SEP IRA — it lets you contribute as both "employee" and "employer," so you hit meaningful contribution levels at far lower income than a SEP IRA requires. A SEP IRA still wins on pure simplicity: no annual filing, opens in minutes at almost any brokerage, and you can decide how much to contribute after the year is basically over. The wrong reason to pick either: not knowing the Solo 401(k) has a December 31 setup deadline, while a SEP IRA can be opened as late as your tax-filing deadline (with extensions) — which is why so many procrastinators end up with a SEP IRA by default, not by choice.

Here's the real comparison: contribution limits side by side, who wins at your income level, the paperwork difference, and how to actually open each one.

The one-line answer

If you're under 50, earning under roughly $150,000 in net self-employment income, and want to save aggressively for retirement, the Solo 401(k) lets you contribute more of your income than a SEP IRA at the same earnings level — sometimes two or three times as much. If you want the simplest possible setup with zero ongoing paperwork and don't mind a smaller contribution ceiling at lower income, the SEP IRA is the lower-friction choice. Above roughly $280,000 in net self-employment income, the two plans converge to nearly the same maximum, so the simplicity of a SEP IRA starts to look more attractive.

Contribution limits, side by side (2026)

SEP IRA Solo 401(k)
Who contributes Employer only (that's you) You as "employee" (deferral) + you as "employer" (profit-sharing)
2026 employee deferral None $24,500 (under 50); $32,250 with catch-up (50-59 and 64+); $34,750 "super catch-up" (ages 60-63)
Employer contribution Up to 25% of net SE earnings Up to 25% of net SE earnings
2026 total contribution cap $72,000 $71,500 (under 50); higher with catch-up contributions layered on top
Roth option No Yes, at many providers (Roth Solo 401(k))
Loan option No Yes, at many providers — up to 50% of the balance or $50,000, whichever is less
Deadline to open Your tax-filing deadline, including extensions Must be established by December 31 of the tax year
Annual filing None Form 5500-EZ once plan assets exceed $250,000
Setup complexity Minutes, at almost any brokerage Slightly more paperwork; many brokerages (Fidelity, Schwab, Vanguard) now offer a free, self-service version

The employee deferral is the whole story. A SEP IRA only lets you contribute 25% of net SE earnings — no separate deferral bucket. A Solo 401(k) lets you front-load nearly $24,500 as an "employee" before the 25% employer math even starts, which is why it wins so decisively for anyone below high six figures in income.

The number that actually decides it: your income

This is the part generic comparisons skip. Run your own numbers before deciding — here's what the gap actually looks like at real income levels (net self-employment earnings, single filer, under 50, no employees):

Net SE income SEP IRA max Solo 401(k) max Solo 401(k) advantage
$40,000 ~$7,442 (25% after SE tax adjustment) ~$24,500 + ~$7,442 employer = ~$31,942 (capped at income) Solo 401(k) lets you shelter nearly your entire net income
$75,000 ~$13,955 $24,500 + ~$13,955 = ~$38,455 Solo 401(k) contributes roughly 2.75x more
$150,000 ~$27,907 $24,500 + ~$27,907 = ~$52,407 Solo 401(k) contributes roughly 1.9x more
$280,000+ $72,000 (cap) $71,500 (cap, under 50) Roughly equal — SEP IRA's simplicity wins the tiebreaker

(These figures use the standard net SE earnings adjustment — 92.35% of net profit, minus the employer-equivalent contribution — so treat them as directional; run your exact numbers with a CPA or the plan provider's calculator before you contribute.)

The pattern: the lower your income, the bigger the Solo 401(k)'s advantage, because the $24,500 employee deferral doesn't depend on the 25%-of-earnings math at all. A part-time side-hustler earning $40,000 net can put away most of it in a Solo 401(k); the same person is capped at roughly a quarter of that in a SEP IRA.

When the SEP IRA is actually the better call

Contribution ceiling isn't the only variable. Pick a SEP IRA if:

  • You want zero ongoing admin. No Form 5500-EZ ever, no plan documents to maintain, nothing to remember each December.
  • You missed the Solo 401(k)'s December 31 deadline. A SEP IRA can be opened and funded as late as your extended tax deadline (October, if you file an extension) — the single biggest reason people end up with a SEP by default.
  • Your income is unpredictable and you don't want to commit to a contribution amount until you actually know your profit. You decide the percentage after the year closes either way, but a SEP has no year-end deadline pressure to have the account itself open.
  • You expect to hire W-2 employees soon. A SEP IRA requires you to contribute the same percentage for eligible employees that you take for yourself — worth knowing before you scale, since it changes the cost math the moment you're no longer solo.

When the Solo 401(k) is worth the extra setup

Pick a Solo 401(k) if:

  • You're not maxing out a SEP IRA's ceiling and want to save more at your current income. This is the majority case for anyone under roughly $150k net.
  • You're 50 or older. The catch-up contributions ($32,250 total at 50-59 and 64+, $34,750 at 60-63) exist only in the 401(k) world — a SEP IRA has no catch-up provision.
  • You want a Roth option. Many Solo 401(k) providers offer Roth treatment on the employee-deferral portion, letting you split pre-tax and after-tax savings. SEP IRAs are pre-tax only.
  • You might want to borrow against the balance. Solo 401(k)s can permit participant loans; IRAs (including SEP IRAs) legally cannot.
  • You truly have no employees now or planned. A Solo 401(k) generally requires you (and a spouse, if they work in the business) to be the only participants — bring on a W-2 employee who meets eligibility rules and you may need to convert to a different plan.

How to actually open each one

SEP IRA: Open an account at any major brokerage (Fidelity, Schwab, Vanguard, etc.), sign the adopting employer's agreement they provide (usually IRS Form 5305-SEP or the broker's equivalent), and fund it by your tax-filing deadline including extensions. No EIN strictly required if you're a sole proprietor, though most people already have one — see how to get an EIN for free if you don't.

Solo 401(k): You'll need an EIN (required, not optional, for this plan type). Choose a provider, complete the plan adoption agreement before December 31, and fund the employee-deferral portion by year-end (some providers allow the deferral election to be made late in the year even if the cash moves in early the following year — confirm your provider's exact rule). The employer contribution can typically be made up until your tax-filing deadline, same as a SEP.

Either way, this is one of the most underused deductions self-employed people miss — retirement contributions reduce your taxable income dollar for dollar, on top of building the nest egg itself.

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Frequently Asked Questions

Can I have both a SEP IRA and a Solo 401(k) in the same year?

Generally no for the same self-employment income in a meaningful way — you can technically hold both accounts, but IRS aggregation rules mean your combined employer-side contributions across both plans still can't exceed the overall limit tied to your net earnings. Most people pick one plan per business rather than trying to stack both.

What happens to my Solo 401(k) if I hire an employee?

If you hire a W-2 employee who meets the plan's eligibility requirements (commonly age 21+ and 1,000+ hours worked), you generally can't keep the plan as a "solo" 401(k) — you'll need to either make them eligible to participate or convert to a different employer-sponsored plan. This is the main reason fast-growing businesses eventually move off Solo 401(k)s.

Is a Solo 401(k) worth it if I only make $30,000-$40,000 a year self-employed?

Often yes, more than people expect. Because the $24,500 employee deferral doesn't depend on the 25%-of-earnings formula, a lower earner can shelter a much larger share of a modest income in a Solo 401(k) than in a SEP IRA — sometimes nearly all of it, up to your net earnings.

Can I contribute to a Solo 401(k) or SEP IRA and still get my day-job's 401(k) match?

Yes, if you have a side hustle alongside W-2 employment, you can contribute to both your employer's 401(k) and a Solo 401(k) or SEP IRA for your self-employed income — but the $24,500 employee-deferral limit is shared across all 401(k) plans you participate in (employer's plan plus your Solo 401(k) combined), while the employer-side contribution to your Solo 401(k) or SEP IRA is separate and not shared.

Do I need an accountant to set up a Solo 401(k) or SEP IRA?

Not strictly — most major brokerages walk you through account opening and calculate your contribution limit for you. But it's worth a CPA's time once, especially the first year, to confirm your exact net self-employment earnings calculation (it isn't simply your gross revenue) before you commit to a contribution amount.