If you're self-employed with no employees, the two retirement plans you'll hear about most are the SEP IRA and the Solo 401(k). Both are generous, both are deductible, and both share the same 2026 cap of $72,000 before catch-ups. The difference is how quickly you reach it.
How each plan works
A SEP IRA takes one kind of contribution: an employer contribution of up to 25% of compensation. For a sole proprietor that works out to 20% of net earnings from self-employment, which is Schedule C profit minus the deductible half of self-employment tax.
A Solo 401(k) takes that same employer contribution and adds an employee deferral of up to $24,500 for 2026. From age 50 there's an $8,000 catch-up on top, and at ages 60 to 63 it's $11,250 instead.
Half of SE tax
$16,955 ÷ 2equals$8,478
Net earnings
$120,000 − $8,478equals$111,522
SEP maximum
20% × $111,522 (cap $72,000)equals$22,304
Income tax saved
tax before − tax after the deductionequals$4,907
Side by side at three incomes
- $60,000 of profit: SEP $11,152; Solo 401(k) $35,652, or $43,652 from age 50.
- $120,000 of profit: SEP $22,304; Solo 401(k) $46,804, or $54,804 from age 50.
- $200,000 of profit: SEP $37,177; Solo 401(k) $61,677, or $69,677 from age 50.
At every one of these incomes the Solo 401(k) allows about $24,500 more, the size of the employee deferral. The gap only closes at about $376,000 of profit, where the SEP also reaches $72,000, and with catch-ups the Solo 401(k) stays ahead at any income.
Net earnings
$120,000 − half of SE taxequals$111,522
Employer share
20% × $111,522equals$22,304
Employee deferral
$24,500 − $0 other plansequals$24,500
Catch-up
age 45equals$0
Total
$22,304 + $24,500 + $0equals$46,804
When a SEP IRA still makes sense
- Simplicity: a SEP has no annual filing. A Solo 401(k) needs Form 5500-EZ once assets pass $250,000.
- Timing: you can open and fund a SEP up to your tax filing deadline, including extensions. Solo 401(k) employee deferrals generally have to be elected by the end of the year.
- A day job's 401(k): your $24,500 employee limit is shared across all 401(k) plans, so if you already max it out at work, a Solo 401(k)'s extra room is only the employer share, the same as a SEP.
- Future employees: if you hire, a SEP must cover eligible employees at the same percentage, and a Solo 401(k) stops being available.
Tip: Contributions reduce income tax, not self-employment tax. At $120,000 of profit, a $22,304 SEP contribution saves a single filer about $4,900 of federal income tax.
Questions people ask
- Can I contribute more to a Solo 401(k) or a SEP IRA?
- Usually a Solo 401(k): it allows the same employer share as a SEP plus a $24,500 employee deferral in 2026, so about $24,500 more until profit reaches roughly $376,000.
- What are the 2026 limits?
- $72,000 of combined contributions, plus catch-ups for a Solo 401(k): $8,000 from age 50 or $11,250 at ages 60 to 63. The employee deferral alone is $24,500.
- Can I have both a SEP IRA and a Solo 401(k)?
- Generally not for the same business in the same year without complications. Most self-employed people choose one; check with the plan provider or a tax adviser.