Solo 401(k) vs. SEP IRA: The Self-Employed Retirement Math

Every self-employed founder eventually hits the same fork: you’re profitable enough that leaving retirement savings on the table is a real cost, and every 401(k) provider, brokerage landing page, and finance influencer has a slightly different opinion on which account to open. The honest answer isn’t “it depends” hand-waving — it’s arithmetic that changes depending on your income, and it changed again this year because of a rule most existing articles haven’t caught up to.

The Structural Difference

A SEP IRA (Simplified Employee Pension) only has one contribution bucket: the employer share. As a self-employed person, “employer” is you, so the whole contribution comes out of business profit, capped at 25% of compensation — which, after the self-employment tax adjustment, works out to roughly 20% of net self-employment income in practice.

A Solo 401(k) has two buckets. You contribute as the “employee” (an elective deferral, same as a W-2 worker’s 401(k) contribution) and as the “employer” (a profit-sharing contribution, same 25%-of-compensation math as the SEP). Because the employee bucket doesn’t depend on hitting a percentage-of-income threshold, a Solo 401(k) reaches its maximum contribution at a much lower income than a SEP IRA does.

That’s the whole difference. Everything below is what it does to your actual numbers.

2026 Contribution Limits, Side by Side

2026 figures are from the IRS: Notice 2025-67 and 401(k) limit increases to $24,500 for 2026. Note that participants aged 60–63 can reach $83,250 in total annual additions using the higher catch-up.

Both plans share the same $72,000 ceiling for 2026 because both are subject to the same IRS annual-additions limit under Section 415(c). The SEP simply has no way to reach it below a high income level, because it only has the one, percentage-based bucket.

The Income Level That Actually Changes the Answer

This is the part generic comparison articles gloss over. Run the numbers at three income points and the picture is clear.

At $80,000 net self-employment income:

• SEP IRA max: roughly $16,000 (20% of net SE income)
• Solo 401(k) max: $24,500 employee deferral + ~$16,000 employer share ≈ $40,500

At this income, the Solo 401(k) shelters roughly $24,000 more — the entire gap is the employee-deferral bucket the SEP doesn’t have.

At $150,000 net self-employment income:

• SEP IRA max: roughly $30,000
• Solo 401(k) max: $24,500 + ~$30,000 ≈ $54,500

Still a wide gap — about $24,500 more sheltered in the Solo 401(k), because the employee deferral is a flat dollar amount, not a percentage, so it adds the same absolute advantage regardless of income until the combined total hits the $72,000 ceiling.

At $280,000 net self-employment income:

• SEP IRA max: roughly $56,000 (still 20% of net SE income — the ceiling isn’t binding yet)
• Solo 401(k) max: $72,000 (capped — $24,500 + ~$56,000 would be $80,500, so the $72,000 limit takes over)

This is where the gap starts closing, but it hasn’t closed: the Solo 401(k) still shelters $16,000 more.

At $360,000 net self-employment income:

• SEP IRA max: $72,000 (20% of net SE income finally reaches the ceiling on the employer share alone)
• Solo 401(k) max: $72,000

Here, and only here, the two accounts genuinely converge. Two numbers are worth remembering: the Solo 401(k) hits the $72,000 ceiling at about $237,500 of net self-employment income, and the SEP doesn’t reach it until about $360,000 ($72,000 ÷ 20%). Below $237,500 the Solo 401(k) advantage is the full $24,500 deferral. Between $237,500 and $360,000 that advantage shrinks steadily to zero. Only above roughly $360,000 do the two accounts cap out at the same total.

Where the SEP IRA Actually Wins

The Solo 401(k) isn’t better in every dimension, and for some founders the SEP is the right call anyway:

• Zero paperwork. A SEP IRA can be opened and funded at almost any brokerage in minutes, with no plan document to adopt, no annual Form 5500-EZ regardless of balance, and no compliance testing.
• You can decide the contribution amount after the year ends. SEP contributions can be set and made as late as your tax-filing deadline (including extensions), which suits founders with lumpy, hard-to-predict income who don’t want to commit to an employee-deferral election mid-year.
• It survives having employees more gracefully — up to a point. If you ever bring on a part-time contractor who becomes a common-law employee, a SEP’s eligibility rules (age, years of service, minimum compensation) are simpler to administer than running a 401(k) with a non-owner participant, though at that point the cost of covering an employee at the same percentage you take yourself is real and worth pricing out before it happens.

The SECURE 2.0 Deadline Most Articles Still Get Wrong

Older Solo 401(k) guidance — plenty of it still ranking on Google — says the plan must be opened by December 31 of the tax year to make employee deferral contributions for that year. That was true before 2023. It no longer is.

Section 317 of SECURE 2.0 lets a sole proprietor with no employees open a Solo 401(k) as late as their tax-filing deadline, not including extensions — April 15 of the following year for a calendar-year filer — and still make employee deferral contributions retroactively for the prior tax year. For 2026 tax returns, that deadline is April 15, 2027.

This matters in practice: a founder who realizes in February that they had a great year no longer has to have missed the Solo 401(k) window. The employer-side contribution deadline (tax-filing deadline including extensions) hasn’t changed for either plan type — it’s specifically the employee deferral retroactive-election rule that’s new, and it only applies to sole proprietors, not owners of S-Corps or partnerships who are on payroll.

Who Should Pick Which

Choose a Solo 401(k) if:

1. You have no employees other than a spouse.
2. Your net self-employment income is under roughly $360K, where the employee-deferral bucket still adds real, non-trivial savings — the full $24,500 below about $237,500, and a shrinking but nonzero amount above it.
3. You want a Roth contribution option, or the ability to take a plan loan against the balance.
4. You’re comfortable filing Form 5500-EZ once the account crosses $250,000 in assets — a five-minute form, not an audit trigger.

Choose a SEP IRA if:

1. You want the lowest-effort account to open and fund, with no ongoing filing obligation regardless of balance.
2. Your income is high enough (roughly $360K+ net) that the two accounts cap out at the same total anyway.
3. You have — or might soon have — employees you’d need to cover, and you want the simpler eligibility framework.
4. You want to decide your contribution amount at tax time rather than committing to deferral elections during the year.

Neither account is “wrong” for a profitable solo founder. The Solo 401(k) is a strictly larger contribution ceiling at moderate income, in exchange for one extra IRS form once the balance grows and a plan document to maintain. The SEP trades some of that ceiling for genuine simplicity. For a deeper framework on treating tax and retirement structure as an active decision rather than something to default into — the same instinct behind running the S-Corp election math instead of just forming an LLC and moving on — JL Collins’s The Simple Path to Wealth is the clearest plain-English explanation of why founders should treat these decisions as compounding, not administrative.

FAQ

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

Yes, but the $72,000 annual-additions limit is shared across all defined-contribution plans you control — you can’t stack two accounts to double the ceiling. Some owners maintain a small legacy SEP alongside a Solo 401(k) for historical assets, but new contributions still count against the combined cap.

Does a Solo 401(k) work if I also have a day job with a 401(k)?

Yes, but the $24,500 employee-deferral limit is per person across all your 401(k) plans, not per plan. If you already defer $15,000 at a W-2 job, you have $9,500 of employee-deferral room left for your Solo 401(k), though the employer-side profit-sharing contribution from your self-employment income is calculated independently.

What counts as “net self-employment income” for these calculations?

It’s net profit from Schedule C (or your share of partnership income), minus the deduction for one-half of self-employment tax. It is not the same as gross revenue, and it is not the same number used for W-2 salary comparisons — a common error that overstates how much room either plan actually has.

Can an S-Corp owner use a Solo 401(k)?

Yes — the plan works for S-Corp owner-employees too, but the math changes: contributions are based on your W-2 salary from the S-Corp, not a percentage of net profit, and the SECURE 2.0 late-adoption rule for retroactive employee deferrals applies only to sole proprietors, not S-Corp payroll.

Is a Solo 401(k) safe from creditors the same way an employer 401(k) is?

Generally yes — Solo 401(k) assets get the same strong ERISA-style creditor protection in bankruptcy as an employer-sponsored 401(k), which is broader than the state-by-state protection that applies to IRAs, including SEP IRAs. It’s a secondary factor, but it’s a real one for founders carrying personal-guarantee risk.

Both accounts beat doing nothing by a wide margin — the real mistake isn’t picking the “wrong” one, it’s leaving six figures of tax-advantaged room unused because the comparison felt complicated. Run your net income through the table above, check which deadline actually applies to you, and open the account before the money becomes this year’s spending instead of next decade’s compounding. For more on structuring founder finances deliberately instead of by default, see the finance section on FutureSharks.