Tax

Solo 401(k) vs. SEP-IRA for Self-Employed Owners

If you're self-employed with no employees, both plans let you stash big retirement contributions, but the math, deadlines, and admin differ.

By Aparna Devalla, CPA3 min · 5 slidesUpdated July 26, 2026

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Why This Matters

Self-employed business owners can shelter $72K+ per year (2026 limit; adjusts annually) in pre-tax retirement contributions, far more than the $7,500 IRA limit.
Pre-tax contributions reduce current-year taxable income dollar-for-dollar, meaningful at higher marginal rates.
Tax-deferred growth compounds for decades. A $50K annual contribution over 20 years at 7% is over $2M in retirement.
Two main vehicles for the solo-owner-no-employees scenario: Solo 401(k) and SEP-IRA. Each has tradeoffs.

SEP-IRA: Simple, Limited

Contribution limit: up to 25% of net self-employment compensation (effectively ~20% of net SE profit after the half-of-SE-tax deduction), capped at $72K (2026).
Only employer contributions, no employee deferral, so you cannot make personal contributions on top of the employer portion.
Setup and maintenance are dead simple: most custodians have a one-page Form 5305-SEP, and ongoing admin is essentially zero.
Deadline: contributions can be made up to the extended tax return due date (October 15 with extension).
Best for: lower-profit years, owners who want zero administrative complexity, single-owner businesses that may add employees soon.

Solo 401(k): More Flexible, More Powerful

Two contribution buckets: employee deferral (up to $24,500 / $32,500 with catch-up if 50+) AND employer profit-sharing (up to 25% of net SE comp). Total capped at $72K (2026).
Roth option: many Solo 401(k) plans allow Roth employee deferrals, so you pay tax now and withdraw tax-free in retirement.
Lets you hit the maximum at much lower profit levels because the employee-deferral piece doesn't depend on income, only profitability.
Setup is one-time (custodian's adoption agreement); Form 5500-EZ required once plan assets exceed $250K.
Deadline: plan must be ESTABLISHED by Dec 31; contributions can be made up to the extended return due date.

How to Choose

Profit under ~$75K? Solo 401(k) wins: the $24.5K employee deferral lets you contribute more than the SEP's 25% cap on low profit.
Profit $75–240K? Solo 401(k) still tends to win; you can contribute the $24.5K deferral PLUS employer profit-sharing.
Profit above $240K with simplicity priority? SEP-IRA reaches the $72K cap easily with minimal admin.
Want Roth contributions? Solo 401(k); SEPs don't allow Roth contributions.
Adding W-2 employees soon? Solo 401(k) cannot continue once you have non-spouse employees, so you'd need to convert to a SEP or full 401(k). Plan ahead.

Common Mistakes

Missing the December 31 establishment deadline for Solo 401(k): you can fund it by October next year, but the plan must exist by year-end.
Treating SE compensation as gross profit instead of net SE comp (profit minus half of SE tax); overcontributing creates excess contribution penalties.
Not tracking the $250K plan-asset threshold for Solo 401(k): Form 5500-EZ is required, and missing it triggers steep penalties.
Maxing both a SEP and Solo 401(k) at the same business is not allowed; both count against the same combined $72K cap.
Weighing the options? Rubric Financial models the tax impact of each plan type as part of year-end tax planning.

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Educational content, not tax, legal, or accounting advice. Confirm with a CPA before acting.

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