SEP IRA vs Solo 401(k): Which Is Better for Self-Employed? (2026)

Both SEP IRAs and Solo 401(k)s let self-employed individuals save substantial amounts for retirement while reducing taxes. But one usually wins for your specific situation.

The difference can be thousands of dollars in annual tax savings—and tens of thousands more in retirement.

This guide breaks down the real differences so you can choose the account that works harder for you.

Quick Comparison

Understanding the Contribution Math

This is where SEP IRAs and Solo 401(k)s diverge significantly.

SEP IRA Contributions

Formula: 25% of net self-employment income (after SE tax deduction)

Example at $100,000 net SE income:

• Net SE income: $100,000
• SE tax deduction: $7,650
• Contribution base: $92,350
• Max contribution: $92,350 × 25% = $23,088

Solo 401(k) Contributions

Formula: Employee contribution ($23,500) PLUS employer contribution (25% of net SE income)

Example at $100,000 net SE income:

• Employee contribution: $23,500 (elective deferral)
• Employer contribution: $92,350 × 25% = $23,088
• Total possible: $23,500 + $23,088 = $46,588

The difference: At $100,000 income, Solo 401(k) allows $23,500 more in contributions.

Contribution Limits by Income Level

Key insight: Solo 401(k) wins until income exceeds ~$280,000. At that point, both hit the $70,000 annual maximum.

The Roth Advantage (Solo 401(k) Only)

Solo 401(k) plans can include a Roth option—SEP IRAs cannot.

Why Roth matters:

• Contribute after-tax dollars now
• Withdrawals in retirement are 100% tax-free
• No required minimum distributions (RMDs) if rolled to Roth IRA
• Hedge against future tax rate increases

Strategy: Split contributions between traditional (pre-tax) and Roth based on:

• Current vs. expected future tax bracket
• Need for current tax deduction
• Tax diversification goals

Loan Provision (Solo 401(k) Only)

Solo 401(k) plans can allow loans from your account—SEP IRAs cannot.

Solo 401(k) loan rules:

• Borrow up to 50% of vested balance or $50,000 (whichever is less)
• Repay within 5 years (longer for home purchase)
• Interest paid goes back into your account

When this matters:

• Emergency fund access without penalty
• Short-term business capital needs
• Major purchase bridge financing

Caution: Failure to repay triggers taxes + 10% penalty. Use carefully.

Setup and Administrative Requirements

SEP IRA

Setup: Simple. Complete IRS Form 5305-SEP or brokerage paperwork.

Deadline: Can establish and fund by tax filing deadline (including extensions)

Administration: Minimal. No annual filings required.

Cost: Usually free at major brokerages.

Solo 401(k)

Setup: More complex. Need plan documents (many brokerages provide free templates).

Deadline: Plan must be established by December 31 of contribution year.

Administration: File Form 5500-EZ annually if assets exceed $250,000.

Cost: Usually free setup, minimal ongoing costs.

Important deadline difference: You can't open a Solo 401(k) in April and contribute for the prior year. Must be established by December 31.

Which Should You Choose?

Choose SEP IRA if:

• Income exceeds $280,000 (both plans cap at $70,000)
• You want minimal paperwork and administration
• You might hire employees in the future (Solo 401(k) requires no common-law employees)
• You're opening an account after December 31 for prior year
• Simplicity is your top priority

Choose Solo 401(k) if:

• Income is under $280,000 (maximize contributions)
• You want Roth contribution option
• You want loan access to your funds
• You're comfortable with slightly more paperwork
• Maximizing retirement savings is priority

For most freelancers earning $50,000-$200,000: Solo 401(k) is typically better due to higher contribution limits.

Tax Savings Comparison

Scenario: Freelancer with $100,000 net SE income, 24% marginal bracket

Difference: Solo 401(k) provides $5,640 more in tax savings for this freelancer.

Over 20 years, that additional $23,500 annual contribution growing at 7% becomes $1,000,000+ more in retirement.

Can You Have Both?

Yes, but contribution limits coordinate.

Combined limit: $70,000 total employer contributions across all plans

Employee deferral limit: $23,500 across all 401(k) plans

Scenario: You have a side gig with Solo 401(k) and a full-time job with 401(k)

• $23,500 employee deferral limit is shared
• Employer contributions are per-plan (up to 25% of each income source)

Work with a tax professional if you have multiple plans.

How to Open Each Account

Opening a SEP IRA

1. Choose a brokerage (Fidelity, Schwab, Vanguard all offer free SEP IRAs)

2. Complete application (usually online in 15 minutes)

3. Fund account (transfer or check)

4. Complete IRS Form 5305-SEP (or brokerage equivalent)

Opening a Solo 401(k)

1. Choose a provider (Fidelity, Schwab, Vanguard, or specialty providers)

2. Complete plan documents (adoption agreement, basic plan document)

3. Get EIN if you don't have one (free from IRS)

4. Open account and fund

5. Track for Form 5500-EZ requirement

Deadline reminder: Solo 401(k) must be established by December 31. Plan ahead.

Frequently Asked Questions

Can I switch from SEP IRA to Solo 401(k)?

Yes. You can stop contributing to SEP IRA and open a Solo 401(k). Some people roll SEP IRA funds into the Solo 401(k) for consolidation, but this isn't required.

What if I have employees?

SEP IRA: Must contribute the same percentage for all eligible employees.

Solo 401(k): Cannot have common-law employees (except spouse). If you hire employees, you'd need a standard 401(k) or SIMPLE IRA.

Can my spouse participate?

Yes, if your spouse earns income from your business. Solo 401(k) is particularly powerful for couples—both can contribute up to $70,000 each ($140,000 total household contribution).

What about catch-up contributions?

Age 50+: Additional $7,500 catch-up allowed for Solo 401(k) ($77,500 total). SEP IRA has no catch-up provision.

Make the Right Choice

The right retirement account can mean hundreds of thousands more in retirement savings. Use AlphaTax's Retirement Optimizer to model both options with your specific income and see exactly how much you can contribute and save.

Compare Your Retirement Options →