Key takeaways
- A SEP contribution is limited to 20% of net self-employment income; a solo 401(k) adds a $24,500 employee deferral on top of the same 20%, so at $100,000 of income the solo 401(k) allows about $43,000 versus $18,600.
- The solo 401(k) allows Roth deferrals, catch-ups of $8,000 (or $11,250 at ages 60 to 63), and does not block the backdoor Roth; a SEP does all three the wrong way.
- Both must be set up by the tax filing deadline, but solo 401(k) employee deferrals must be elected by December 31.
- A solo 401(k) requires a Form 5500-EZ once assets exceed $250,000 and cannot cover employees; a business that hires needs a different plan.
A self-employed person with no employees has two main choices for a retirement plan, and it used to be a real trade-off: the SEP IRA's simplicity against the solo 401(k)'s higher limits. That trade-off has mostly evaporated. Brokerages now open solo 401(k)s in minutes at no cost, and the SEP's one remaining edge, flexibility on timing, has narrowed. For nearly every consultant, physician, contractor, or business owner without employees, the solo 401(k) shelters more and does it better.
The contribution math
SEP IRA. The business contributes up to 25% of compensation. For a sole proprietor, "compensation" means net self-employment earnings after the deduction for half of self-employment tax and after the contribution itself, which works out to 20% of net earnings. The 2026 maximum is $72,000, and getting there takes roughly $375,000 of net earnings.
Solo 401(k). Two contributions. As the employee, a deferral of up to $24,500 in 2026 (plus $8,000 catch-up at 50, or $11,250 at ages 60 to 63). As the employer, the same 20% of net earnings as a SEP. Combined, up to $72,000 (plus catch-up), reached at roughly $250,000 of net earnings.
| Net self-employment earnings | SEP IRA max | Solo 401(k) max (under 50) |
|---|---|---|
| $50,000 | $9,300 | $33,800 |
| $100,000 | $18,600 | $43,100 |
| $200,000 | $37,200 | $61,700 |
| $300,000 | $56,900 | $72,000 |
The gap is widest exactly where most self-employed people live. At $100,000 the solo 401(k) allows more than twice the SEP. For an S corporation owner, both plans measure compensation by W-2 salary, and the employer contribution is 25% of that salary; the deferral still exists only in the 401(k).
Roth
A solo 401(k) can take Roth employee deferrals, and since 2023 can take Roth employer contributions if the plan document allows. A SEP can technically accept Roth contributions under the same law, but few custodians offer it. If you're in a moderate bracket, or you want tax diversification, the Roth choice inside the 401(k) is a real advantage.
The backdoor Roth
A SEP IRA is a traditional IRA for purposes of the pro-rata rule. Anyone with a SEP balance who tries a backdoor Roth gets most of the conversion taxed. A solo 401(k) isn't an IRA and doesn't enter the calculation. So for a high earner who wants both a large pre-tax contribution and an annual backdoor Roth, the SEP shuts the second door. The solo 401(k) leaves both open, and it can even absorb an existing SEP or IRA balance by rollover to clear the way.
Timing
A SEP can be established and funded up to the tax filing deadline, including extensions, for the prior year. That was its great advantage: a taxpayer who discovered a large tax bill in September could open a SEP and deduct a contribution for the year before. A solo 401(k) can now also be established after year-end for employer contributions (a SECURE Act change), but the employee deferral has to be elected by December 31 of the year it applies to (SECURE 2.0 carves out one exception: a sole proprietor opening a brand-new plan after year-end can make first-year deferrals up to the unextended filing deadline), and once elected it can be funded up to the filing deadline. The practical rule: open the solo 401(k) before year-end, make the deferral election in writing, and fund by the deadline.
Administration
A SEP has essentially none. A solo 401(k) needs a plan document (the brokerage provides it), a written deferral election, and, once plan assets pass $250,000, an annual Form 5500-EZ, a short filing with a stiff penalty for missing it. A solo 401(k) also allows loans, if the document permits, and can hold the same investments as an IRA.
The one hard limit: a solo 401(k) covers only the owner and a spouse. Hire an employee who works more than 1,000 hours a year (or 500 hours for two consecutive years under the long-term part-time rules) and the plan has to cover them. At that point the business needs a real 401(k) with a provider, or a SEP that contributes the same percentage for every eligible employee. Our business owner planning post covers the plans for businesses with staff.
When a SEP still makes sense
Someone who earns self-employment income on the side, already maxes a 401(k) at a day job, and has no interest in Roth or backdoor contributions gets the same employer contribution from either plan with less paperwork from the SEP. (The $24,500 deferral limit is per person across all plans, so a second deferral isn't available anyway; the employer contribution is per plan.) And anyone who realizes in March that they should have contributed for last year can still open a SEP.
Beyond $72,000
A self-employed person over about 45 with income well above $300,000 who wants to shelter more than the 401(k) allows can add a defined benefit or cash balance plan, with contributions of $100,000 to $300,000 a year depending on age. It takes an actuary and a multi-year commitment, and it's the highest-capacity tool there is. We look at it when both the income and the intent to save are stable.
Where this lands in the plan
The choice is part of the annual tax projection: plan type, the split between deferral and employer amounts, Roth versus pre-tax, and the deadlines. For most clients without employees, it's a solo 401(k), opened at a brokerage with a no-cost plan document, with the deferral election documented before year-end and the contribution sized to the bracket.
Frequently asked questions
Can I have both a SEP and a solo 401(k)?
Yes, but the combined employer contributions are limited to the same 20%, so there's no extra capacity. The usual reason to have both is a transition: rolling the SEP into the 401(k) to clear the pro-rata rule.
Does my spouse count as an employee?
A spouse who works in the business can be covered by the solo 401(k) with their own deferral and employer contribution, which doubles the household's capacity.
What if I have a 401(k) at my employer and self-employment income on the side?
The $24,500 deferral limit is shared across both plans. The employer contribution to the solo 401(k) is separate and limited by the $72,000 overall limit for that plan alone.
Is the contribution deductible from self-employment tax?
No. Retirement contributions reduce income tax but not self-employment tax, which is computed on net earnings before the contribution.
Joseph G. Valerio, CFP®, EAFounder and Lead Advisor at Valerio Wealth Management, a fee-only, fiduciary virtual family office in Miami, Florida. One advisor, credentialed in both financial planning and federal tax. About Joseph
This article is general education, not individualized advice, and it is not tax, legal, or accounting advice. Figures reflect federal law for the year stated and can change. Valerio Wealth Management does not prepare or file tax returns. Speak with a qualified professional about your own situation before acting.
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