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 is wildly different from W-2 employees:

• W-2 employee 401(k) limit: $24,500 employee deferral + $8,000 catch-up (50+)
• Solo self-employed via Solo 401(k): up to ~$72K combined employee + employer
• Solo self-employed via SEP-IRA: up to ~$72K via employer-only contribution

Most self-employed owners default to an IRA with a $7,500 limit. That leaves about 90% of their possible savings unused. 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 and employer.

Contribution mechanics (2026):

• Employee deferral: up to $24,500 ($32,500 with catch-up if 50+), can be Roth or Traditional
• Employer contribution: up to 25% of the W-2 pay the S-corp pays you, if you own an S-corp. For a sole proprietor or partner, the employer limit is 20% of net earnings from self-employment, after the self-employment tax adjustment. Use the IRS worksheet in Pub. 560 to get the exact number. Contributions are usually pre-tax. Some plans also let you make them as Roth money (SECURE 2.0 §604), and you pay tax on them that year. Ask your plan provider if yours does.
• Combined cap: $72,000. If you are 50 or older, add the $8,000 catch-up for $80,000. If you are 60 to 63, the catch-up is $11,250 instead, for $83,250.
• 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: Set up a Solo 401(k) by December 31 to make employee deferrals for that year. If you are a sole owner with no employees and this is the plan’s first year, you can set it up after year end. You must do it by the tax filing deadline, not counting extensions (April 15 for most people). You can still make that year’s employee deferrals. Employer contributions can be made up to the 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 W-2 pay if you own an S-corp. For a sole proprietor or partner, it is 20% of net earnings from self-employment after the SE tax adjustment, capped at $72,000.
• 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). Say you file in October on an extension. 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 $24,500/yr.
• You are 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 $24,500 employee deferral is huge next to what the SEP-IRA’s 25%-of-net rule would fund.
• You want flexibility on contribution timing and amount. Each year you can dial employee and employer contributions independently.
• You might need a loan. Some Solo 401(k) plans let you borrow from your own balance. A SEP-IRA does not. The most you can borrow is $50,000 or half of your balance, whichever is less. You must pay it back within five years. Check that your plan allows loans before you sign up.
• You plan to roll a 401(k) from a former employer. A Solo 401(k) can accept the rollover. A SEP-IRA generally cannot accept former-employer 401(k) rollovers.

#When SEP-IRA wins

Narrower cases:

• 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. The 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 $72K total contribution. If you will always max it via the employer side, the 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. You can have both plans for the same business, but your limits are combined. If you already have a Solo 401(k), you can make the employer part after year end, up to your filing deadline with extensions. You usually do not need a SEP-IRA for that.

#What about a Cash Balance Plan?

Solo 401(k) and SEP-IRA cap at ~$72K/yr. A cash balance plan is a pension plan with required yearly funding. For high earners over 50, it can allow much larger deductions than a Solo 401(k). The amount depends on your age and pay, so an actuary must set it. You must fund it every year, and it limits the employer part of your 401(k).

#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 plus spouse. Adding non-spouse employees means upgrading to a standard 401(k). That is doable, but it adds compliance cost of about $1,500 to $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), your spouse needs to be a legitimate employee (payroll, W-2, actual work). Just being married to you is not enough. There has to be a defensible employment relationship.

---

If you are a self-employed owner and your retirement contribution capacity has not 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, and HSA. We will walk you through the full retirement-stacking picture on the call.