Solo 401(k) vs. SEP-IRA: Which One Fits?

#Why this comparison matters

Self-employed owners (sole proprietors, single-member LLCs, S-corp owners) face a 2026 contribution-cap landscape that’s wildly different from W-2 employees:

• W-2 employee 401(k) limit: $23,500 employee deferral + $7,500 catch-up (50+)
• Solo self-employed via Solo 401(k): up to ~$70K combined employee + employer
• Solo self-employed via SEP-IRA: up to ~$70K via employer-only contribution

Most self-employed owners default to a Traditional IRA ($7K limit) and leave 90%+ of their available contribution capacity on the table. The Solo 401(k) or SEP-IRA closes that gap.

#Solo 401(k) — the deep version

Structure: A 401(k) plan where the only participants are the business owner (and optionally a spouse). The owner wears two hats — employee + employer.

Contribution mechanics (2026):

• Employee deferral: up to $23,500 ($31,000 with catch-up if 50+), can be Roth or Traditional
• Employer contribution: up to 25% of net self-employment income (after self-employment tax adjustment) — Traditional only
• Combined cap: $70,000 ($77,500 with catch-up)
• Spouse working in business: spouse can contribute their own employee + employer share, effectively doubling the household capacity

Setup: File Form 5500-EZ once balance exceeds $250K (annually thereafter). Initial plan document via brokerage (Fidelity, Schwab, E*TRADE all offer free Solo 401(k)). Setup time: ~1 hour. Ongoing cost: $0 at most brokerages.

Roth feature: Employee deferral can go to Roth Solo 401(k). Big advantage over SEP-IRA. Lets you split contribution between tax-deferred (employer side) and tax-free at retirement (employee Roth side).

Loans: Solo 401(k) allows participant loans up to 50% of balance / $50K max. SEP-IRA does not.

Timing: Plan must be established by December 31 of the tax year to make employee contributions for that year. Employer contributions can be funded up to the tax-filing deadline (including extensions).

#SEP-IRA — the deep version

Structure: Simplified Employee Pension IRA. Employer-only contribution into an IRA owned by each participant.

Contribution mechanics (2026):

• Employer contribution only: up to 25% of net self-employment income (after SE tax adjustment), capped at $70,000
• No employee deferral — entire contribution is employer-side
• No catch-up provision — unlike 401(k), age 50+ doesn’t add to the limit
• All employees must be included — if you have non-spouse employees, you must contribute the same percentage for all eligible employees

Setup: Open an SEP-IRA at any brokerage. ~15 minutes. No plan document required.

Roth feature: SEP-IRA does NOT have a Roth option (as of 2026, the SECURE 2.0 Roth-SEP provision is technically available but most brokerages haven’t implemented it).

Loans: Not allowed.

Timing: Can be opened and funded up to the tax-filing deadline (including extensions). For someone who files in October on an extension, this means you can establish and fund a SEP-IRA up to October 15 for the prior year. Solo 401(k) doesn’t allow this — plan must exist by Dec 31.

#Side-by-side comparison

#When Solo 401(k) wins

For most self-employed owners, this is the right answer:

• You want Roth contributions. Solo 401(k) employee Roth gives you tax-free withdrawals in retirement on up to $23,500/yr.
• You’re under 25% of net SE income at full Solo 401(k) capacity. For a moderate-income solo ($60K-150K net), the Solo 401(k)‘s $23,500 employee deferral is huge relative to what you could fund via SEP-IRA’s 25%-of-net rule.
• You want flexibility on contribution timing/amount. Each year you can dial employee + employer contributions independently.
• You might need a loan. Solo 401(k) loan provision is the only retirement vehicle that lets you borrow from your own balance.
• You plan to roll a 401(k) from a former employer. Solo 401(k) can accept rollover; SEP-IRA generally cannot accept former-employer 401(k) rollovers.

#When SEP-IRA wins

Narrower:

• You’re funding for a tax year that already ended and missed the Dec 31 Solo 401(k) deadline. SEP-IRA can be opened and funded up to your tax-filing deadline (incl. extensions). This is the single most-common SEP-IRA scenario for ETS clients.
• You have employees and want to avoid 401(k) administration complexity. SEP-IRA’s all-employees-proportional rule is simpler than 401(k) non-discrimination testing.
• You’re at the very top of the contribution range and don’t care about Roth. Both vehicles cap at $70K total contribution; if you’ll always max it via employer side, SEP-IRA’s simplicity wins.

#Which one fits you

#The hybrid approach

Many high-income ETS clients use both. Open a Solo 401(k) for ongoing year contributions. When a great income year happens and you’re past Dec 31, fund a SEP-IRA for that year (since Solo 401(k) plan must have existed by Dec 31 of the contribution year). This double-dipping isn’t possible in the same year — but across years it lets you catch up missed contributions.

#What about a Cash Balance Plan?

Solo 401(k) and SEP-IRA cap at ~$70K/yr. For high-income owners ($500K+ net) approaching age 50+, a Cash Balance plan on top can shelter another $100-200K/yr.

#Common questions

Can I contribute to both a Solo 401(k) and a SEP-IRA in the same year? Technically yes, but if you contribute to both for the same business, the contribution limits are aggregated. Most useful when one business has a Solo 401(k) and a separate business has a SEP.

What if I have employees in my business? Solo 401(k) is only for owner + spouse. Adding non-spouse employees means upgrading to a standard 401(k) (which is doable but adds compliance cost ~$1,500-3,000/yr). SEP-IRA can include employees but requires equal-percentage contributions to all eligible employees.

Can I roll over an IRA into a Solo 401(k)? Yes. Most brokerages let you roll over Traditional IRAs into the Solo 401(k). This is often useful for backdoor Roth strategy because Solo 401(k) balances don’t aggregate into IRA pro-rata rules.

What if my income varies year to year? Both plans let you skip years and vary contribution amounts. There’s no minimum-funding requirement (unlike defined-benefit plans like Cash Balance).

Does my spouse working in the business have to be on payroll? For Solo 401(k), spouse needs to be a legitimate employee (payroll + W-2 + actual work). Just being married to you isn’t enough — there has to be a defensible employment relationship.

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If you’re a self-employed owner and your retirement contribution capacity hasn’t been modeled, the Discovery call is the right next step. For high-income owners we often layer Solo 401(k) + Cash Balance + mega-backdoor Roth + HSA — we’ll walk you through the full retirement-stacking picture on the call.