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Both accounts let a self-employed person save much more than an IRA allows, and the contributions are generally tax-deductible. The right one depends on your income and how much you want to save.
2026 limits at a glance
| Solo 401(k) | SEP IRA | |
|---|---|---|
| Who contributes | You as employee and as employer | Employer contribution only |
| Employee deferral | Up to $24,500 (plus $8,000 catch-up at 50+, or $11,250 at ages 60–63) | Not available |
| Employer contribution | About 20% of net self-employment earnings | About 20% of net self-employment earnings |
| Overall cap (excluding catch-up) | $72,000 | $72,000 |
| Compensation counted | Up to $360,000 | |
| Roth option | Many plans offer it | Traditionally pre-tax; check your provider |
| Paperwork | Plan document and EIN; annual filing (Form 5500-EZ) once assets pass $250,000 | Simple form; no annual filing in most cases |
For the self-employed, the "20%" is of net earnings after deducting half of your self-employment tax (that is how the IRS's 25%-of-reduced-compensation rule works out).
How much could you contribute?
Which should you choose?
- Lower to middle profit, want to save more: the Solo 401(k) usually allows a bigger total because the employee deferral doesn't depend on a percentage of income. At $100,000 profit the maximum is roughly $43,000 in a Solo 401(k) versus roughly $18,600 in a SEP.
- Very high profit: both reach the $72,000 cap, so simplicity may decide it and the SEP is easier.
- Want it simple, or contributing late: a SEP can be opened and funded by your tax-filing deadline, including extensions.
- Plan to hire employees: a SEP requires contributing the same percentage for eligible employees; a Solo 401(k) is only for owners (and spouses). Talk to a professional before hiring.
Deadlines for opening a plan and making employee deferrals have changed in recent years, so check IRS Publication 560 or your provider before assuming. Contribution limits are from the IRS's annual announcement; see the IRS page on 401(k) and profit-sharing contribution limits.
Other limits worth knowing
The 2026 traditional or Roth IRA limit is $7,500 (plus $1,100 if 50 or older) and the SIMPLE IRA limit is $17,000. Deductibility of IRA contributions and Roth eligibility depend on income.
FAQ
Can I have a Solo 401(k) and a day job 401(k)?
Yes, but the employee deferral limit ($24,500 in 2026) applies across all your 401(k)s combined. The employer portion from your own business is separate.
Does contributing lower my self-employment tax?
No. These contributions reduce income tax but not self-employment tax, which is based on net earnings from self-employment.
Which has lower fees?
It depends on the provider. Many brokerages offer both with no account fee. Compare the investment options and any plan fees.