SEP IRA vs Solo 401(k) for self-employed

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 $69,000 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 ($23,000 in 2026, plus $7,500 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

If your self-employment income is under $200K and you want to maximize contributions, Solo 401(k) wins. If income is high enough that 25% of net income hits the $69K cap, SEP IRA matches Solo on contribution but with simpler paperwork. If you have any employees beyond a spouse, both options become complex — consider a SIMPLE IRA or full 401(k).

The Backdoor Roth interaction

A SEP IRA balance triggers the pro-rata rule on Backdoor Roth conversions, taxing each conversion proportionally. A Solo 401(k) does not. High earners who plan to use Backdoor Roth IRAs strongly prefer Solo 401(k) for this reason.

Late-year setup

You can open and fund a SEP IRA up to your tax deadline (April 15, or October 15 with extension) for the prior year. A Solo 401(k) plan must be ESTABLISHED by December 31, but funded up to the tax deadline. If you discover self-employment income late in the year, the SEP IRA is the only option for that year.