Solo 401(k) vs SEP IRA in 2026: limits and which to choose

Updated October 22, 2026 · By the Solo Tax Optimizer team · Not tax advice

Self-employed people don't get an employer 401(k), but they can set up their own retirement plan and often save more than employees can. The two most popular options are the Solo 401(k) (also called an individual 401(k)) and the SEP IRA. Both let you deduct contributions, but they work differently.

2026 limits at a glance

*For sole proprietors and single-member LLCs, effectively 20% of net self-employment earnings. See below.

How the contribution is calculated

Sole proprietors and single-member LLCs

Your "compensation" is net profit minus the deduction for half of self-employment tax. The employer contribution is 20% of that figure, which is the same as 25% of compensation after the contribution itself.

Example: $100,000 net profit, age 40

At this income, the Solo 401(k) allows more than twice as much because of the employee deferral. The SEP only catches up at much higher incomes, where 20% of earnings alone approaches the $72,000 total limit.

S-Corp owners

If you have elected S-Corp status, contributions are based only on your W-2 salary, not on distributions. The employer contribution is up to 25% of salary. With a $60,000 salary, that is $15,000, plus up to $24,500 of employee deferrals in a Solo 401(k). This is one reason why a very low S-Corp salary can backfire.

Other differences

Setup and deadlines

A SEP IRA can be opened and funded as late as your tax return due date, including extensions, for the previous year. That makes it a useful last-minute option. Solo 401(k) rules are stricter. Employee deferrals generally have to be elected by the end of the year, although sole proprietors opening a new plan can sometimes make first-year deferrals up to the filing deadline. Employer contributions can be made up to the return due date. Check the exact rules with your plan provider.

Paperwork

A SEP needs almost no ongoing paperwork. A Solo 401(k) must file Form 5500-EZ once plan assets exceed $250,000 at the end of a year. There are penalties for missing it.

Employees

If you later hire employees, a SEP generally requires the same percentage contribution for eligible employees as for yourself. A Solo 401(k) is only for owners and their spouses.

Loans and Roth

Many Solo 401(k) providers allow loans and Roth deferrals. SEP IRAs don't allow loans.

Which should you choose?

• Choose a Solo 401(k) if you want to save as much as possible on a moderate income, want a Roth option, or are 50 or older and want catch-up contributions.
• Choose a SEP IRA if you want the simplest possible plan, your income is high enough that 20% of earnings reaches your savings goal, or it is already past year-end and you want a deduction for last year.

The tax effect

Traditional contributions reduce your federal income tax at your marginal rate. A $20,000 contribution in the 22% bracket saves about $4,400 of federal income tax this year. They also slightly reduce your QBI deduction. They do not reduce self-employment tax. The calculator lets you include retirement contributions when comparing a sole proprietorship and an S-Corp.

Frequently asked questions

This guide explains general federal tax rules for the 2026 tax year. It is not tax, legal or financial advice. Your situation may differ, so talk to a qualified tax professional before acting on it.