SEP IRA vs Solo 401(k) for self-employed
Retirement accounts for freelancers, consultants, and small business owners. Contribution limits and which to pick.
Simplified Employee Pension IRA — a retirement account for self-employed people that allows contributions up to 25% of net self-employment income, capped at $72,000 in 2026.
Example: A consultant with $80,000 net income can contribute up to $20,000 to a SEP IRA.
A 401(k) for self-employed individuals with no full-time employees. Allows both employee deferral ($24,500 in 2026) and employer profit-sharing (up to 25% of net income).
Example: Same $80,000 consultant can contribute $24,500 employee + $20,000 employer = $44,500 total.
A retirement plan for small businesses with up to 100 employees. Lower contribution limits ($17,000 employee + 3% employer match in 2026) but minimal administration.
Example: Best for businesses with employees who want to provide retirement benefits with minimal cost.
Self-employed individuals have access to retirement accounts with much higher contribution limits than W-2 employees. The two main options — SEP IRA and Solo 401(k) — overlap in maximum contribution but have very different mechanics.
SEP IRA: the easy option
Contributions only come from the employer side (you, as your own employer). Limit is 25% of net self-employment income, up to $72,000 for 2026. Setup is one form (5305-SEP) and an account opening at any major broker. No annual filings. Funds grow tax-deferred; withdrawals after 59½ are taxed as ordinary income.
Solo 401(k): the higher-limit option
Combines employee deferral ($24,500 in 2026, plus $8,000 catch-up if 50+) with employer profit-sharing (up to 25% of net income). At lower income levels (under $200K), this lets you contribute much more than a SEP IRA. Adds a Roth option (Solo Roth 401(k)) and the ability to take loans against the balance. Requires Form 5500-EZ filing once balance exceeds $250,000.
How to pick
Compare the employee-deferral opportunity, employer-contribution calculation, plan costs, Roth availability, loan features, filing requirements, other employer plans and employee coverage rules. A Solo 401(k) can allow a different contribution pattern than a SEP IRA, but the result depends on net earnings and the current IRS limits; do not treat an income threshold as a universal winner.
The Backdoor Roth interaction
A SEP IRA balance can affect a Roth conversion under the pro-rata rules, while a properly structured qualified plan may be treated differently. Check all traditional, SEP and SIMPLE IRA balances and the current Form 8606 instructions before relying on a conversion strategy.
Late-year setup
SEP and one-participant 401(k) establishment and funding deadlines depend on the entity, tax year, plan document and filing status. Confirm the current IRS deadline and provider process before assuming that a plan can be opened or funded for a prior year.
Frequently asked questions
Can I have both a Solo 401(k) and a regular IRA?
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What happens to my Solo 401(k) if I hire an employee?
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Where should I open these accounts?
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Sources & further reading
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