If you are a sole proprietor, single-member LLC owner, or independent contractor with no employees other than a spouse, the two retirement plans worth considering are the Solo 401(k) and the SEP-IRA. Both shelter substantial income from current tax, both have flexible funding, and both can be invested in any IRA-permitted assets. But they differ on five practical dimensions — contribution math, Roth option, loan availability, administration burden, and interaction with the IRA pro-rata rule — that make one decisively better for most situations. This guide walks through the 2026 limits, the math behind each plan, and the situations where one beats the other.
| Feature | Solo 401(k) | SEP-IRA |
|---|---|---|
| 2024 Employee deferral limit | $23,000 ($30,500 if 50+) | $0 (no employee deferral) |
| 2024 Employer profit sharing | 25% of W-2 wages OR 20% of net SE income | 25% of W-2 wages OR 20% of net SE income |
| 2024 Total cap (§ 415) | $69,000 ($76,500 if 50+) | $69,000 |
| Roth contribution | Yes (employee deferral portion); Roth employer also under SECURE 2.0 | Roth SEP allowed since 2023 but few providers |
| Catch-up (50+) | $7,500 additional | None |
| Loans permitted | Yes (up to 50% of balance or $50K) | No |
| Setup deadline | Plan adopted by Dec 31; employer contributions by tax filing deadline | Can establish AND fund by tax filing deadline (including extensions) |
| Administrative burden | Form 5500-EZ once assets > $250K | Minimal — no annual filing |
| Plan investments | Self-directed possible; check provider | Same as IRA — most investments allowed |
| Hire employees? | Disqualifies plan; must convert | Must include eligible employees with same % |
| Backdoor Roth interaction | Money excluded from IRA pro-rata pool | Included in IRA pro-rata pool |
| Setup cost | $0-$1,500 (provider-dependent) | $0 |
| Annual cost | $0-$500 | $0-$50 |
The 25% employer contribution rate looks the same for both plans but the application differs by entity type:
The 25% rate is applied to "net compensation" — which is net Schedule C income reduced by:
The effective contribution rate is therefore approximately 20% of net SE income (after half SE tax).
The 25% rate is applied to W-2 wages (S-corp) or guaranteed payments (LLC/partnership). The owner can elect higher salary to maximize contribution, but salary triggers FICA tax (15.3% combined). Optimal salary balances retirement contribution vs FICA savings.
Facts: Single sole proprietor, age 42, $100,000 net Schedule C income.
Step 1: SE tax calculation.
Step 2: Net compensation for retirement.
Step 3: SEP-IRA contribution.
Step 4: Solo 401(k) contribution.
Solo 401(k) shelters $22,000 more than SEP at this income.
Facts: Sole proprietor, age 55, $350,000 net Schedule C income.
Solo 401(k) shelters $7,500 more (catch-up advantage) at this income.
The employee deferral can be designated as Roth at the participant's election. For a 35-year-old in the 24% bracket today expecting to be in 32% in retirement (high-earning tech worker), Roth Solo 401(k) deferral is ideal:
SEP-IRA technically permits Roth contributions since SECURE Act 2.0 (2023), but few providers have built the infrastructure as of 2026 — Solo 401(k) remains the practical Roth-for-self-employed vehicle.
Solo 401(k) plans can permit loans up to 50% of vested balance or $50,000 (whichever is less). Loan terms are typically 5 years for non-residence purposes; 15-30 years for primary residence purchase. The loan is repaid to your own account with interest. SEP-IRAs cannot make loans — loans from any IRA are prohibited transactions causing immediate full taxation plus penalty.
For high-earning self-employed individuals doing backdoor Roths, SEP-IRA money is a major problem. The IRA pro-rata rule (§ 408(d)(2)) treats all your Traditional IRA, SEP, and SIMPLE balances as one pool when computing the tax-free portion of a backdoor Roth conversion. A $100,000 SEP balance turns a $7,000 backdoor Roth into a 7% tax-free / 93% taxable event.
Solution: Use Solo 401(k) instead of SEP-IRA. Solo 401(k) money is NOT in the pro-rata pool. Self-employed individuals already in SEP can also do a "reverse rollover" — move SEP money INTO a Solo 401(k) — eliminating the pro-rata problem before year-end.
| Task | Solo 401(k) | SEP-IRA |
|---|---|---|
| Plan document | Required (provider provides) | Form 5305-SEP (one page) |
| Annual IRS filing | Form 5500-EZ once assets > $250K | None |
| Participant disclosures | SPD, summary of material modifications | None for self-employed only |
| Plan termination | Form 5500-EZ final filing required | None |
| Year-end reporting | Form 1099-R for distributions | Form 1099-R for distributions; Form 5498 for contributions |
SEP-IRA is the only retirement plan that can be retroactively established. You can set up and fund a SEP-IRA for tax year 2025 as late as the 2025 tax filing deadline (April 15, 2026; October 15, 2026 if extended). This is invaluable for surprise high-income years.
Solo 401(k) setup timing was relaxed by SECURE Act 1.0: the plan document can be adopted up to the tax filing deadline (April 15 or with extension), with employer contributions funded by the same deadline. However, employee deferrals must still be elected in the year earned — you cannot retroactively make employee deferrals.
Both are retirement plans for self-employed individuals. Solo 401(k) allows two contribution types — employee deferral (up to $23,000, $30,500 if 50+ in 2024) and employer profit-sharing (up to 25% of compensation). SEP-IRA only allows employer-style contribution (up to 25% of compensation/20% of SE income). Solo 401(k) supports Roth and loans; SEP does not. SEP-IRA has simpler administration but lower contribution flexibility.
2024 baseline limits: $23,000 employee deferral ($30,500 if age 50+), plus 25% employer contribution. Total contributions cannot exceed $69,000 ($76,500 if 50+) under § 415. Catch-up contributions of $7,500 are additional for age 50+. 2026 figures will be inflation-adjusted. For sole proprietors, employer contribution is calculated as 20% of net SE income (after half SE tax deduction) due to the deduction-of-the-deduction circular calculation.
Up to 25% of net compensation (or 20% of net SE income for sole proprietors) up to the § 415 limit ($69,000 in 2024). No employee deferral component. No catch-up contribution. No Roth SEP-IRA option (Roth SEP allowed starting 2023 under SECURE Act 2.0 but few providers offer it as of 2026). The contribution percentage must be the same for all eligible employees if any.
Yes. The employee deferral portion can be designated as Roth (after-tax), separately from any employer contributions. Many Solo 401(k) plans also support in-plan Roth rollovers, allowing pre-tax employer contributions to be converted to Roth dollars subject to ordinary income tax. SECURE Act 2.0 also added Roth SEP-IRA and Roth SIMPLE IRA options (rarely offered in practice as of 2026).
Technically yes, but the § 415 limit applies in total. Most self-employed individuals choose one. Solo 401(k) is generally superior because of employee deferral, Roth, and loan options. SEP-IRA may suit owner-employees with high variable income who prefer flexibility and simplicity. Having both adds administrative complexity without raising the contribution ceiling.
Solo 401(k): plan document must be adopted by December 31 of the tax year (SECURE Act allows establishment after year-end for employer-only contributions if completed before tax filing deadline including extensions). SEP-IRA: can be established up to the tax filing deadline (April 15, October 15 extended) for the prior tax year. SEP-IRA is the only retirement plan that can be retroactively established for the prior year.
Solo 401(k) is only available to businesses with NO common-law employees other than the owner and spouse (subject to anti-affiliation rules). Hiring a non-spouse employee disqualifies a Solo 401(k); the plan must convert to a full 401(k). SEP-IRA allows employees but requires contributing the same percentage for all eligible employees (age 21+, 3 of last 5 years service, $750 compensation in 2024).
No. The IRA pro-rata rule under § 408(d)(2) applies only to IRAs (Traditional, SEP, SIMPLE), not 401(k) plans. SEP-IRA money is in the pro-rata pool and complicates backdoor Roths — moving SEP money to a Solo 401(k) removes it from the pool. This is a key reason why high-earning self-employed individuals doing backdoor Roths prefer Solo 401(k) over SEP-IRA.