Solo 401(k) vs. SEP IRA: Which Is Right?
Self-employed individuals have access to retirement accounts with contribution limits far higher than a standard IRA - but choosing between them requires understanding how each one works at your specific income level.
SEP IRA: Simple but Limited
A SEP IRA allows employer-only contributions of up to 25% of net self-employment income, capped at $72,000 for 2026. Setup is easy - open one at any major brokerage in minutes.
Solo 401(k): Higher Limits, Slightly More Complex
The Solo 401(k) allows both an employee deferral ($24,500 in 2026) and an employer profit-sharing contribution (up to 25% of net self-employment income). The combined total can reach $72,000.
The bottom line
The employee deferral is a flat amount, not a percentage - this is the key structural advantage at moderate income levels.
Which One?
- No employees and want maximum contribution capacity: Solo 401(k)
- Want simplicity above all else and don't need Roth access: SEP IRA
- Also do a Backdoor Roth IRA: Solo 401(k), to avoid the pro-rata rule
What would you do?
Alex is a freelance consultant earning $120,000 net self-employment income. She wants to maximize retirement contributions.
Your Move
Check whether you have any employees (other than a spouse); if not, you likely qualify for a Solo 401(k). Compare the total contribution capacity at your income level. If you also want to do a Backdoor Roth IRA, note that a SEP IRA balance triggers the pro-rata rule while a Solo 401(k) does not.
Sources
- Internal Revenue Service, Notice 2025-67
2026 retirement plan limits (401(k), IRA, SIMPLE, catch-up)
Educational information only. Not financial, tax, or legal advice or a recommendation. Figures are drawn from the primary sources cited above; verify current amounts with the source before acting.
Educational content only. Not financial, tax, or legal advice. Consult a qualified professional before making decisions based on your specific circumstances.
Last reviewed: April 2026