You finally had a profitable year freelancing. You want to shovel some of it into a retirement account before the tax bill lands. So you Google around and find two names that come up in every self-employed retirement article: the Solo 401(k) and the SEP IRA. They share the same 2026 ceiling — $72,000, the overall defined-contribution limit the IRS set in Notice 2025-67 — and they both let you write off the contribution as a business expense. So why does anyone prefer one over the other?
Because at every income below roughly $200,000 of net self-employment earnings, the Solo 401(k) lets you stash thousands more dollars than the SEP IRA — sometimes more than $20,000 more in the same tax year. The SEP IRA's advantage is administrative simplicity. Once you understand the math, the right answer for your situation usually becomes obvious in under five minutes. This guide walks through the rules, a worked example at $80,000 of net income, and the cases where each plan actually wins.
The 30-second comparison
Both plans are tax-deferred (pre-tax in, taxed on withdrawal in retirement). Both are aimed at the self-employed and small business owners. The headline difference is how much you can contribute:
- Solo 401(k): You wear two hats — employee and employer. You can defer up to $24,500 as the employee in 2026 (the IRS elective-deferral limit), plus contribute roughly 20% of your net self-employment income as the employer, capped together at $72,000.
- SEP IRA: You only get the employer side. The contribution is the lesser of 25% of compensation or $72,000 — roughly 20% of net self-employment income for a sole proprietor, or 25% of W-2 wages if you pay yourself through an S-corp.
At low and middle incomes, that flat $24,500 employee deferral is the whole game. Two freelancers earning $80,000 in net self-employment income can fund retirement accounts that differ by more than $24,000, just because one chose the Solo 401(k) and the other chose the SEP IRA.
2026 contribution limits and rules
The IRS announced the 2026 retirement plan limits in Notice 2025-67 on November 13, 2025. The numbers below are the ones that drive the comparison:
| 2026 rule | Solo 401(k) | SEP IRA |
|---|---|---|
| Employee elective deferral | $24,500 | Not allowed |
| Employer contribution rate | Up to 25% of compensation (≈20% net SE income for sole proprietors) | Up to 25% of compensation (≈20% net SE income for sole proprietors) |
| Total annual additions cap | $72,000 | $72,000 |
| Age 50–59 catch-up | +$8,000 | Not allowed |
| Age 60–63 "super" catch-up (SECURE 2.0) | +$11,250 (if plan allows) | Not allowed |
| Compensation cap for the % calculation | $360,000 | $360,000 |
| Roth contributions available | Yes (most providers) | Yes (SECURE 2.0), but provider rollout is patchy |
| Plan loans allowed | Yes, up to $50,000 | No |
| Annual filing requirement | Form 5500-EZ once plan assets reach $250,000 or more | None |
Two details from the 2026 limits deserve a flag. First, the catch-up contributions only apply to the Solo 401(k), not the SEP IRA — so a 55-year-old chooses very differently than a 35-year-old. Second, under SECURE 2.0 a separate rule will require age-50+ high earners — those whose prior-year FICA wages from the plan sponsor exceeded the inflation-indexed threshold ($150,000 for the 2025 wages that govern 2026 catch-ups, up from the original $145,000) — to make their catch-up on a Roth basis; the IRS final regulations apply that requirement to taxable years beginning after December 31, 2026. It is more relevant for W-2 employees, but worth knowing if your business pays you on a W-2.
The "20%, not 25%" trap for self-employed savers
Most articles say the employer contribution is "up to 25% of compensation." That's technically right — but if you are a sole proprietor or single-member LLC, your effective rate is closer to 20% of net self-employment income, not 25%. The reason is two intertwined rules:
- "Compensation" for a self-employed person is net SE income after the deduction for half of self-employment tax and after subtracting the employer contribution itself.
- That circular definition forces you to solve 0.25 ÷ 1.25 = 0.20. So 25% of post-contribution compensation equals 20% of pre-contribution compensation.
For S-corp owners paying themselves on a W-2, this trap doesn't apply — the 25% is straightforward. But for the millions of sole proprietors filing Schedule C, the effective ceiling on the employer side is 20% of net SE earnings (less the half-SE-tax adjustment). The IRS publishes a worksheet for the exact calculation in Publication 560.
Worked example: $80,000 of net self-employment income
Imagine you are 38, single, run a one-person consulting practice, and your Schedule C shows $80,000 in net self-employment income for 2026. Half of your SE tax is roughly $5,652, leaving "compensation" of about $74,348 for the contribution formula. Here is what each plan lets you stash:
| Contribution source | Solo 401(k) | SEP IRA |
|---|---|---|
| Employee deferral | $24,500 | $0 |
| Employer profit-share (20% of $74,348) | $14,870 | $14,870 |
| Total contribution | $39,370 | $14,870 |
The Solo 401(k) lets you tuck away $24,500 more at exactly the same income. At a 22% marginal tax bracket plus state, that extra deferral can shave roughly $6,000–$7,500 off your tax bill in 2026 alone, on top of decades of tax-deferred growth.
Now run the same math at $300,000 of net SE income and the gap shrinks: both plans hit (or get close to) the $72,000 ceiling. That is why the Solo 401(k) advantage is loudest for low-to-middle-income freelancers and quietest for very high earners.
When the Solo 401(k) wins
The Solo 401(k) is the default answer for most one-person businesses. It wins when:
- Your net SE income is under about $200,000. The flat employee deferral is the difference-maker. Run the numbers in our 401(k) Calculator to see how the deferral compounds over 20–30 years.
- You want Roth contributions. Solo 401(k)s widely offer designated Roth deferrals. SEP IRA Roth contributions are technically allowed under SECURE 2.0 but most providers haven't rolled them out yet.
- You are 50 or older. Only Solo 401(k)s allow catch-up contributions — up to $8,000 extra at age 50–59, and $11,250 for ages 60–63 under SECURE 2.0's "super catch-up."
- You might need a loan from the plan. Solo 401(k)s permit loans of up to $50,000 (or 50% of your vested balance). SEP IRAs do not.
- You want to do a clean backdoor Roth IRA. SEP IRA balances are aggregated under the pro-rata rule, which can wreck a backdoor Roth conversion. Solo 401(k) balances are not. See our backdoor Roth IRA guide.
When the SEP IRA wins
The SEP IRA is the simpler animal. Choose it when:
- You set it up late. A SEP IRA can be opened and funded up to your tax filing deadline (including extensions) for the prior tax year. A Solo 401(k) usually has to be established by December 31 of the tax year, though SECURE 2.0 carved out a narrow extension for sole proprietors.
- You want zero ongoing paperwork. SEP IRAs have no annual IRS filing. Solo 401(k)s require Form 5500-EZ once plan assets reach $250,000 or more at year-end.
- Your net SE income is very high. At ~$320,000 and above, both plans bump into the $72,000 cap, so the employee deferral advantage of the Solo 401(k) starts shrinking and the SEP IRA's simplicity becomes more attractive.
- You have eligible employees. SEP IRAs require equal-percentage contributions for everyone who meets eligibility — fine for a one-person business, expensive once you hire. Solo 401(k)s are designed for owner-only setups and disqualify if you have non-spouse employees.
What about taxes, withdrawals, and rollovers?
Both plans are taxed identically in withdrawal: pre-tax contributions and earnings are taxed as ordinary income when you take them out in retirement (after age 59½ to avoid the 10% additional tax on early distributions). Both are subject to required minimum distributions (RMDs), which under SECURE 2.0 begin at age 73 for anyone born in 1951 or later.
Rollovers between the two are flexible. You can roll a SEP IRA into a Solo 401(k), or vice versa, without triggering tax. This matters if you start with a SEP IRA in your first profitable year and later upgrade to a Solo 401(k) — you can consolidate the balances and avoid the backdoor-Roth pro-rata problem mentioned earlier.
One more nuance worth knowing: contributions to either plan are still subject to self-employment tax. The retirement contribution reduces your income tax but not the 15.3% SE tax (12.4% Social Security plus 2.9% Medicare) — that's calculated on Schedule SE before any retirement deduction. If quarterly taxes are also on your radar, see our 2026 estimated tax guide.
How to decide in five minutes
Most freelancers and consultants can make this call quickly with three questions:
- Is your net SE income under $200,000? → Solo 401(k), almost always.
- Do you have non-spouse employees? → SEP IRA (or look at a SIMPLE IRA or a real 401(k) plan).
- Did you forget to set anything up before December 31? → SEP IRA for last year, then open a Solo 401(k) for the new year.
If none of those break the tie, the Solo 401(k) generally wins on optionality — Roth contributions, catch-ups, and plan loans are real benefits even if you never use them. The price is the once-a-year Form 5500-EZ once your year-end balance reaches $250,000 or more, which most providers will generate for you.
Frequently Asked Questions
Can I have both a Solo 401(k) and a SEP IRA in the same year?
Technically yes, but the $72,000 total-annual-additions cap applies across both plans combined. Most people pick one or the other to keep paperwork simple.
Do I have to contribute every year?
No. Both plans are discretionary. You can contribute $0 in a lean year and resume in a better one. The Solo 401(k) account just has to stay open.
What if I also have a day job with a 401(k)?
The $24,500 employee deferral is a per-person limit across all 401(k) plans you participate in. If you already maxed out your W-2 employer's 401(k), you can't double-dip on the deferral side, but you can still make the employer profit-share contribution to your Solo 401(k).
Can my spouse participate in my Solo 401(k)?
Yes, if your spouse earns income from the business. That can effectively double your household contribution ceiling. Many owner-spouse teams use this to put away well over $100,000 a year in retirement.
What if I made a SEP IRA contribution last year and want to switch?
Open a Solo 401(k) for the current year, then roll your SEP IRA balance into it. The rollover is tax-free and consolidates your retirement assets under one plan, which also unlocks a clean backdoor Roth IRA going forward.
Are Roth SEP IRA contributions available everywhere?
Not yet. SECURE 2.0 authorized Roth SEP contributions starting in 2023, but provider adoption has been slow — some big custodians have not enabled the feature. Check with your custodian before assuming it is available.
How do I actually estimate my contribution?
The fast approximation is 20% of your net SE income for the employer side, plus $24,500 if you have a Solo 401(k). For an exact figure, use the worksheet in IRS Publication 560 or run the numbers in our retirement calculator and adjust your contribution to see how it changes your projected balance.
This article is for general informational purposes only and is not financial, tax, or investment advice. Contribution limits, catch-up rules, and Roth availability reflect IRS Notice 2025-67 and SECURE 2.0 provisions as of June 2026 and may change; always confirm current figures against IRS.gov before acting. Consult a qualified tax professional or financial advisor about your specific situation before opening or funding a retirement plan.