SEP-IRA vs. Solo 401(k): Which Saves More in Taxes for the Self-Employed?

How the Contribution Limits Actually Compare

Both plans share the same total contribution ceiling: $70,000 in 2026 (plus $7,500 catch-up for age 50+). But they reach that ceiling by different paths, and at lower income levels, the paths produce different outcomes.

**SEP-IRA:** Employer contribution only. Maximum is 25% of net self-employment compensation (after self-employment tax deduction), up to $70,000. No employee elective deferral. Straightforward math.

Example: Net SE income of $80,000. SE tax deduction (~$5,664). Adjusted compensation: $74,336. 25% = $18,584 maximum SEP contribution.

**Solo 401(k):** Two buckets. (1) Employee elective deferral: up to $23,500 (2026), or up to 100% of compensation if less. (2) Employer profit-sharing: up to 25% of W-2 wages or 20% of net SE compensation, same calculation as SEP.

Same $80,000 net income: Employee deferral $23,500 + employer portion $14,087 = **$37,587** total. That's $19,000 more than the SEP-IRA at this income level.

The two plans reach equivalent contribution levels at approximately $220,000+ in net SE income — once the employer contribution portion alone can fill the $46,500 remaining after the employee deferral.

The Roth Solo 401(k) Option

The SEP-IRA is traditional contributions only — pre-tax, taxable on withdrawal. The Roth SEP-IRA was introduced in 2023 under SECURE 2.0 and some custodians now offer it, but adoption has been uneven and the administrative requirements for designated Roth accounts inside SEPs are evolving.

The Solo 401(k) has clearer Roth options: the employee elective deferral portion can be designated as Roth. The employer profit-sharing portion must remain pre-tax (or be converted via plan design).

For a self-employed person in their 40s who expects to be in a higher bracket later — or who anticipates significant business growth — the ability to put $23,500/year into a Roth 401(k) account is meaningful. Over 20 years at 7% annualized return, $23,500/year becomes roughly $1 million in tax-free funds.

The income limit note: unlike Roth IRAs (which phase out at $165,000 MAGI for single filers in 2026), designated Roth 401(k) contributions have no income ceiling. High-income self-employed individuals can make large Roth contributions via Solo 401(k) when they cannot contribute to a Roth IRA directly.

Administration Differences That Actually Matter

**SEP-IRA:** Minimal paperwork. Open at any IRA custodian. Annual contribution due by tax filing deadline including extensions (October 15 for sole proprietors). No annual IRS reporting until assets exceed $250,000 (Form 5500-EZ). No loans.

**Solo 401(k):** More setup involved. Must be established before December 31 of the year contributions are made (contributions themselves can be made by tax filing deadline). Annual Form 5500-EZ required once assets exceed $250,000. Loans allowed — up to 50% of vested balance or $50,000, whichever is less.

The Solo 401(k) loan provision is frequently underappreciated. It creates a liquidity option without the tax and penalty implications of an early withdrawal. A sole proprietor who needs $30,000 for equipment in year three of their business can borrow it from their own 401(k) and repay it with interest back to themselves.

Key constraint: the Solo 401(k) is only available to businesses with no full-time employees other than the owner and their spouse. Once the business has any other full-time employees, the plan must become a regular 401(k) plan, subject to non-discrimination testing.