IndieVaults

Solo 401(k) vs. SEP-IRA for Self-Employed Owners

Solo 401(k) vs. SEP-IRA for 2026: $24,500 deferral and $72,000 total vs. 25% employer-only SEP, Roth options, backdoor Roth pro-rata rule, and admin.

As of 2026-09-24 · By Alpha Kamara

Short answer: Both plans share the same $72,000 overall limit for 2026. A SEP-IRA allows only employer contributions (up to 25% of W-2 pay, or about 20% of net self-employment earnings). A Solo 401(k) adds a $24,500 employee deferral plus catch-ups, so at most income levels it lets you save more. A SEP is simpler to run.

Both plans work for a business owner with no employees. The difference is how you reach the limit and how much work each one takes. A SEP-IRA is employer money only. A Solo 401(k) lets you contribute as both employee and employer, so you can reach a much higher total at modest incomes. The 2026 figures below match our Solo 401(k) contribution limits guide and come from IRS Notice 2025-67 and IRS plan pages (links in Sources).

Side-by-side comparison (2026)

Solo 401(k) (one-participant 401(k)) SEP-IRA
Who contributes You as employee (deferrals) and the business as employer Employer only. No employee deferrals
Employee deferral Up to $24,500, or 100% of compensation if less Not allowed
Catch-up (age 50+) $8,000. $11,250 at ages 60-63 (replaces the $8,000) Not allowed in the SEP. You may make a regular IRA catch-up ($1,100 for 2026) if the SEP-IRA accepts regular IRA contributions
Employer contribution Up to 25% of W-2 wages (S-Corp), or about 20% of net SE earnings after half of SE tax (sole proprietor) Same: 25% of compensation, or about 20% for the self-employed
Total limit (not counting catch-ups) Lesser of $72,000 or 100% of compensation Lesser of 25% of compensation or $72,000
Compensation cap $360,000 $360,000
Roth option Roth deferrals if the plan allows. Roth employer contributions allowed by law (SECURE 2.0 §604) if the plan offers them Roth SEP contributions allowed by law (SECURE 2.0 §601) if the employer and provider offer them
Loans Allowed only if the plan offers them Not allowed
Effect on backdoor Roth (pro-rata rule) 401(k) balances aren't counted SEP-IRA balances count as traditional IRA money on Form 8606
Setup Plan document with a provider, plus a written deferral election Form 5305-SEP or a provider prototype. Not filed with the IRS
Annual IRS filing Form 5500-EZ once plan assets are $250,000 or more at year-end Generally none
Deadline to set up Generally by the business's tax filing deadline, including extensions. S-Corp deferrals have to come out of payroll during the year By the business's tax filing deadline, including extensions
Deadline to fund Employer contributions: tax filing deadline, including extensions. S-Corp deferrals: deposited soon after each payday Tax filing deadline, including extensions
If you hire employees No longer a one-participant plan. Coverage and testing rules apply Must contribute the same percentage for eligible employees (age 21, 3 of the last 5 years, $800 of 2026 compensation, or less restrictive terms)

Contribution limits: why the Solo 401(k) usually wins on dollars

The IRS limits employer contributions to a SEP-IRA to the lesser of 25% of compensation or $72,000 for 2026. A SEP has no employee deferral. The Solo 401(k) allows the same employer contribution plus a $24,500 employee deferral (plus catch-ups). Both are subject to the same $72,000 overall cap. So at the same compensation, the Solo 401(k) allows the same amount as a SEP or more. The gap is widest at low and middle incomes.

A SEP can reach $72,000 only once 25% of your compensation hits $72,000. That takes $288,000 of W-2 wages in an S-Corp ($72,000 ÷ 25%). A Solo 401(k) reaches $72,000 at $190,000 of W-2 wages ($24,500 + 25% × $190,000).

Worked example: same income, both plans (illustrative)

Illustrative only. These are simplified hypotheticals under age 50. They aren't recommendations about salary or contribution amounts. Plan documents can define compensation differently. Confirm with your CPA and plan provider.

Scenario A: owner-only S-Corp, $100,000 W-2 salary

Solo 401(k) SEP-IRA
Employee deferral $24,500 Not available
Employer contribution (25% × $100,000) $25,000 $25,000
Total 2026 $49,500 $25,000

Scenario B: sole proprietor, $100,000 net profit

Using the IRS self-employed method from Publication 560: SE tax is $14,129.55, half is $7,064.78, and $100,000 − $7,064.78 = $92,935.22. The employer contribution at a 25% plan rate is 20% of that.

Solo 401(k) SEP-IRA
Employee deferral $24,500 Not available
Employer contribution (20% × $92,935.22) $18,587 $18,587
Total 2026 $43,087 $18,587

At age 50+, the Solo 401(k) could add $8,000 more ($11,250 at ages 60-63). The SEP can't.

Roth options

  • Solo 401(k) Roth deferrals. If the plan offers designated Roth contributions, you can make some or all of your $24,500 deferral as Roth.
  • Roth employer contributions in a 401(k). SECURE 2.0 section 604 lets plans allow employees to designate employer matching or nonelective contributions as Roth, if the employee is fully vested. The contribution is then included in the employee's income. This feature is optional. Many Solo 401(k) providers don't offer it yet, so check your plan documents.
  • Roth SEP contributions. SECURE 2.0 section 601 lets a SEP send contributions to a Roth IRA if the employee elects it. The employer isn't required to offer this (IRS Notice 2024-2). Not every SEP provider supports it, so ask yours before you count on it.
  • Roth catch-up rule for higher earners. If your 2025 FICA wages from the sponsoring employer were more than $150,000, your 2026 catch-up contributions to a 401(k) must be Roth (Notice 2025-67). SEPs don't have catch-up contributions, so this rule doesn't apply to them.

Backdoor Roth and the pro-rata rule

If your income is above the 2026 Roth IRA limits (the phase-out is $153,000-$168,000 for single filers and $242,000-$252,000 for married filing jointly, per Notice 2025-67), some people make a nondeductible traditional IRA contribution and then convert it to a Roth IRA. The IRS lets you convert a traditional IRA to a Roth IRA (Publication 590-A). The catch is the pro-rata calculation on Form 8606.

  • SEP-IRA balances count. Form 8606 line 6 uses the total value of all your traditional IRAs on December 31 of the conversion year. The instructions say "traditional IRA" includes traditional SEP IRAs. A large SEP-IRA balance can make most of a "backdoor" conversion taxable.
  • Solo 401(k) balances don't count. A 401(k) isn't an IRA, so it's not included in the Form 8606 calculation.
  • Rolling IRA money into a 401(k). Publication 590-A says you can roll a traditional IRA into a qualified plan, but only the part that would otherwise be taxable (not your nondeductible basis). This can clear pre-tax IRA balances before a conversion, if your 401(k) accepts roll-ins. Not every Solo 401(k) accepts roll-ins from traditional or SEP-IRAs, so confirm with your plan provider before you plan a backdoor Roth around it.

If you want to do backdoor Roth contributions, a Solo 401(k) usually works better with them than a SEP-IRA. Have your CPA run the Form 8606 numbers before you convert.

Administration

SEP-IRA:

  • Adopt Form 5305-SEP (you can't use it if you maintain another qualified plan) or a provider's prototype.
  • Give the plan information to any eligible employees.
  • Contribute by the tax deadline, including extensions.
  • There's generally no annual IRS filing.

Solo 401(k):

  • Adopt the plan document.
  • For an S-Corp, make a written deferral election, withhold deferrals through payroll, and deposit them promptly. The IRS Fix-It Guide describes Department of Labor rules requiring deposit as soon as they can reasonably be separated from business assets.
  • Report deferrals in W-2 Box 12.
  • File Form 5500-EZ once assets are $250,000 or more.

The payroll steps are where most Solo 401(k) mistakes happen, and it's the part IndieVaults runs for clients: deferral election, payroll setup, same-day remittance to the 401(k) provider on payday, and a Box 12 check at year-end.

Which one fits?

A Solo 401(k) usually fits when:

  • You want to save more than 25% of your pay.
  • You're 50 or older and want catch-ups.
  • You want Roth deferrals.
  • You plan to do backdoor Roth contributions.

A SEP-IRA can fit when:

  • You want the simplest setup.
  • You're funding late, after the year has closed (for an S-Corp, deferrals can't be made after the last payroll of the year).
  • 25% of your compensation already covers what you want to save.
  • You expect to hire employees and want a simple plan for everyone.

If you're choosing a plan alongside an entity decision, see LLC vs. S-Corp for 1099 contractors and our S-Corp election guide. For how retirement contributions interact with SE tax, see how to reduce self-employment tax.

Frequently asked questions

What is the SEP-IRA contribution limit for 2026?

Employer contributions to a SEP-IRA can't exceed the lesser of 25% of compensation or $72,000 for 2026, per the IRS. Compensation counted is capped at $360,000. For the self-employed, the effective rate is about 20% of net SE earnings after half of SE tax. SEPs don't allow employee deferrals or catch-ups.

Can I contribute more to a Solo 401(k) than a SEP-IRA?

Usually. Both have the same $72,000 overall limit for 2026. The Solo 401(k) adds a $24,500 employee deferral on top of the same employer contribution. For example, with $100,000 of S-Corp W-2 wages, a Solo 401(k) allows $49,500 and a SEP allows $25,000.

Does a SEP-IRA allow catch-up contributions?

No. The IRS says SEPs are funded only by employer contributions, and catch-ups apply only to employee deferrals. If your SEP-IRA accepts regular IRA contributions, you may be able to make a regular IRA contribution plus the IRA catch-up ($1,100 for 2026 at age 50+).

Can I make Roth contributions to a SEP-IRA?

Since SECURE 2.0, a SEP can let employees elect to have contributions go to a Roth IRA. Employers aren't required to offer it, and provider support varies. Roth SEP contributions are included in your income for the year. A Solo 401(k) with a Roth feature is a more widely available way to make Roth contributions.

How does a SEP-IRA affect a backdoor Roth IRA?

A traditional SEP-IRA balance counts in the Form 8606 pro-rata calculation, which uses the value of all your traditional IRAs at December 31 of the conversion year. That can make much of a backdoor conversion taxable. Solo 401(k) balances aren't included.

Can I have both a Solo 401(k) and a SEP-IRA?

The IRS says you can maintain a SEP along with another plan, but not with Form 5305-SEP; you'd need a prototype or individually designed SEP. Contributions for one business generally share one overall limit. In practice, most owners pick one. Have your CPA confirm before funding both.

What are the filing requirements for each plan?

A SEP generally has no annual IRS filing requirement. A Solo 401(k) has to file Form 5500-EZ once plan assets are $250,000 or more at year-end, and for the final plan year when you close the plan. Neither plan gets filed with the IRS when you set it up.

What's the deadline to open and fund each plan for 2026?

A SEP can be set up and funded by the business's tax filing deadline, including extensions. A Solo 401(k) can generally be opened by the same deadline for employer contributions. But S-Corp employee deferrals have to come out of 2026 payroll, so the plan and your deferral election need to be in place before your last 2026 payroll.

Compare plans with your numbers

Use the free IndieVaults tax savings calculator to compare Solo 401(k) and SEP-IRA contributions at your salary or profit. Or book a free tax analysis, and we'll pick the plan with you and your existing accountant. You can also reach us at hello@indievaults.com or (773) 617-5359.

Related guides

Sources

Disclaimer

This guide is for general educational purposes only and is not tax, legal, or investment advice. The worked examples are hypothetical and illustrative. Limits are the 2026 figures published by the IRS as of the date modified above, and rules and provider features can change. Your limits depend on your compensation, entity type, plan document, and any other plans you take part in. Before you open a plan, contribute, or convert, check with your CPA or tax advisor and your plan provider. IndieVaults works alongside your existing accountant and doesn't replace one.

Plan your tax and retirement strategy

Use the educational calculator to explore options for your independent business.

Explore the calculator Book a free tax analysis