A SEP IRA and a Solo 401(k) both let a self-employed person shelter a chunk of profit from tax, but they’re not close to equal. The Solo 401(k) almost always wins for a one-person business, because it stacks an employee-style deferral on top of the same employer-style contribution a SEP allows — often the difference between the two is tens of thousands of dollars a year at the same income.
| Solo 401(k) | SEP IRA | |
|---|---|---|
| Employer-type contribution (20% of profit) | $0 | $0 |
| Employee elective deferral | $0 | Not available |
| Maximum total contribution | $0 | $0 |
Why the Solo 401(k) allows so much more
A SEP IRA only has one contribution type: an “employer” contribution capped at roughly 20% of your net self-employment earnings. A Solo 401(k) allows that same employer-style contribution, plus a separate employee elective deferral — up to $24,500 for 2026, higher if you’re 50 or older — because as a Solo 401(k) participant you’re treated as both the employer and the employee of your own one-person business. That second layer is entirely unavailable in a SEP IRA, which is the whole reason the gap between them is so large.
The trade-off is paperwork: a Solo 401(k) has slightly more setup and annual filing requirements once it grows past $250,000 in assets (Form 5500-EZ), where a SEP IRA stays simpler for the life of the account. For most people that extra form is a small price for the additional room to contribute.
When a SEP IRA still makes sense
SEP IRAs remain simpler to open and administer, and if you plan to hire employees later, a SEP requires you to contribute the same percentage for eligible employees that you take for yourself — which is either a fairness feature or a cost, depending on your plans. If you’re confident you’ll stay a true one-person operation, the Solo 401(k)’s extra contribution room is usually worth the modest added complexity.
Whichever you choose, this is on top of — not instead of — making sure your day-to-day numbers are solid first. See the self-employment tax calculator and retirement savings calculator to see how contributions like these compound over time.
Can I have both a Solo 401(k) and a SEP IRA?
You can technically hold both accounts, but your combined employer-type contributions across all your self-employed retirement plans are still limited by the same overall cap, so there’s rarely a benefit to funding both at once.
Do I need employees to be disqualified from a Solo 401(k)?
Yes, a Solo 401(k) is only available if you (and your spouse, if applicable) are the only participants. Once you have other eligible employees, you’d typically need a different plan type.
Is the 20% employer contribution rate exact?
It’s a standard simplification used for sole proprietors and single-member LLCs, close to but not identical to the exact IRS formula, which technically adjusts for self-employment tax in a circular calculation. A plan provider or accountant can confirm your exact maximum.
This calculator uses 2026 IRS contribution limits and a standard approximation for self-employed contribution calculations. It’s for general estimation only, not tax or financial advice — confirm exact limits with a retirement plan provider or tax professional before contributing.