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Solo 401(k) vs SEP IRA
Your net earnings, your age, your savings goal — the two solo plans priced head to head.
X VS Y COMPARISON · MONEY · BUSINESS
Solo 401(k) vs SEP IRA: Which Wins for the Self-Employed?
The two retirement plans built for people with no boss, priced head to head. A SEP IRA lets you stash about 20% of your net self-employment income — simple, one contribution type, no annual filings. A Solo 401(k) lets you wear two hats: $24,500 as the employee plus the same ~20% as the employer, for a combined $72,000 ceiling in 2026 — with a Roth option and loan access the SEP can’t touch. At the defaults — $100,000 of net earnings, age 40, a $30,000 savings goal — the SEP caps out at $18,587 and can’t hold the goal, while the Solo reaches $43,087: $11,413 of extra room, worth $6,600 of tax savings at a 22% bracket. Change the income, the age, or the goal — and watch which plan earns its keep.
How the math works
Both plans are funded from the same pot — your net self-employment earnings minus half the SE tax — but they divide it differently. The SEP IRA allows only an employer contribution: 25% of compensation, which for the self-employed works out to 20% of adjusted net (the contribution itself reduces the base it’s computed on). The Solo 401(k) adds an employee elective deferral on top: $24,500 in 2026 (plus catch-ups from 50), then the same ~20% employer share, all under one $72,000 combined ceiling. That extra $24,500 of headroom is the entire fight: at the defaults it turns an $18,587 SEP cap into a $43,087 Solo cap. Contributions are deductible at your marginal rate, so the $30,000 goal saves $6,600 at 22% — whichever plan can hold it.
Output · formula · meaning
| Output | Formula | What it means |
|---|---|---|
| Solo 401(k) max | min($24,500 + catch-up + 20% of adj. net, $72,000) | Your ceiling wearing both hats: $43,087 at the defaults. |
| SEP IRA max | min(20% of adj. net, $72,000) | Employer-share only: $18,587 at the defaults. |
| Extra room | your goal − SEP max (when goal exceeds it) | What the Solo unlocks that the SEP can’t: $11,413 at the defaults. |
| Tax savings | deductible contribution × bracket | $6,600 on the $30,000 goal at 22%. |
Who uses this
- Freelancers and consultants: deciding whether the Solo 401(k)’s extra paperwork is worth the headroom at their income.
- Side-hustlers with a day job: checking how the $24,500 elective limit coordinates across two 401(k)s (it’s one shared limit).
- High savers over 50: pricing the catch-up ladder — $8,000 at 50+, $11,250 at 60–63 — against the SEP’s flat cap.
- Researchers & students: the 2026 limits are public IRS figures — cite them with the block below.
Accuracy & limitations
Limits are 2026: $24,500 elective, $72,000 combined, catch-ups $8,000 (50–59, 64+) and $11,250 (60–63). The model assumes a sole proprietor/LLC with no employees and prices deductible contributions only — Roth Solo contributions save $0 today by design. It does not model the day-job 401(k) coordination, controlled-group rules, state quirks, or the Form 5500-EZ filing once Solo assets pass $250,000. Estimates, not tax advice.
Cite this calculatorBright Side Kit. “Solo 401(k) vs SEP IRA: Which Wins?.” brightoolbox.com, 2026.
Bright Side Kit. "Solo 401(k) vs SEP IRA: Which Wins?." https://brightoolbox.com/solo-401k-vs-sep-ira/ Accessed October 23, 2026.Frequently asked questions
What is the real difference in one sentence?
The SEP lets you contribute about 20% of net self-employment income; the Solo 401(k) lets you contribute that plus $24,500 as your own employee — same income, up to $24,500 more room. At $100,000 of net that’s $18,587 vs $43,087. Everything else — Roth option, loans, paperwork — is commentary on that gap.
Can I contribute to both a Solo 401(k) and a SEP IRA?
Yes, but the employer-share limit is shared. You can fund both in the same year, but total employer contributions across both plans can’t exceed 25% of compensation (the $72,000 overall cap still binds the Solo). In practice almost nobody does this — the Solo already contains everything the SEP offers, plus the elective deferral. The one real use case is a SEP from a prior year you keep open.
Does the Solo 401(k) really offer a Roth option?
Yes — for the employee elective deferral. You can designate some or all of your $24,500 (+ catch-ups) as Roth Solo 401(k) contributions: after-tax now, tax-free later. The employer share is always pre-tax (deductible now). A SEP IRA has no Roth option at all — every dollar is pre-tax. If you’re young and in a low bracket, that Roth door is worth real money.
What happens when I hire my first employee?
The Solo 401(k) dies — it legally requires no full-time W-2 employees (a spouse on payroll is the exception). Hire one and you must convert: usually to a SEP IRA (which must then cover eligible employees too) or a full small-business 401(k). Set the employees dropdown to “yes” in the calculator and it’ll tell you the Solo is off the table. Plan the hire before December, not after.
Which plan has the earlier deadline?
The Solo 401(k) must exist by December 31 to make employee elective deferrals for that year — miss New Year’s Eve and the $24,500 is gone for that tax year. Employer contributions (both plans) and SEP contributions can be made up to the tax-filing deadline including extensions. The procrastinator’s edge goes to the SEP; the planner’s edge goes to the Solo.
Is the SEP IRA ever the better pick?
Yes — on simplicity. If your savings goal fits under the SEP cap (try $15,000 in the calculator), both plans hold every dollar, and the SEP wins by having no Form 5500-EZ, no separate elective-deferral election, and a setup that takes minutes. The SEP is also the answer the moment you have W-2 employees. The Solo earns its paperwork only when you need the extra headroom, the Roth, or the loan.