SEP IRA vs Solo 401(k): 2026 Limits Worked Out From $30,000 to $400,000 of Profit

Michael Whitman · Trading since 2017, full-time since 2020 · YouTube creator, 137K subscribers · Published 2026-11-07

A SEP IRA and a solo 401(k) both let a self-employed person shelter far more than an ordinary IRA, and both stop at $72,000 for 2026. The SEP counts only an employer contribution of about 20% of net earnings; the solo 401(k) adds up to $24,500 as your own employee.

Below the cap, that second contribution is the whole difference. Most comparisons say “the solo 401(k) usually lets you save more” and leave it there. This page runs the IRS’s own self-employed worksheet at nine profit levels on 2026 limits, shows where each plan hits the cap, and uses IRS tax statistics to show how few self-employed filers use either plan.

What each one is

A SEP IRA (simplified employee pension) is an IRA that only the business pays into. The IRS caps contributions at the lesser of 25% of compensation or $72,000 for 2026, and says plainly that elective salary deferrals and catch-up contributions are not permitted. If you have eligible employees, you must contribute the same percentage of pay for them as for yourself.

A solo 401(k) (the IRS calls it a one-participant 401(k)) is a full 401(k) plan for a business with no employees other than the owner and a spouse. You contribute in two roles: as the employee, elective deferrals of up to $24,500 in 2026, and as the employer, the same roughly 20% the SEP allows. How a 401(k) works in general is on the 401(k) page, and why either account is only a tax wrapper is on retirement accounts.

Where they differ

Why “20%” and not 25%. For a sole proprietor, “compensation” is net earnings after half of self-employment tax and after the contribution itself. Publication 560 solves that circle with a rate table: a 25% plan rate becomes 0.200000 for your own contribution.

A worked example: the IRS worksheet at nine profit levels

We ran the Deduction Worksheet for Self-Employed from Publication 560 (2025) with the 2026 dollar limits from the IRS COLA table: $72,000 overall, $360,000 compensation, $24,500 deferral, $184,500 Social Security wage base. Profit is Schedule C net profit for a sole proprietor with no employees, under 50, contributing the most each plan allows.

How to redo one row. At $100,000: self-employment tax is 15.3% of 92.35% of profit, $14,130, and half of it, $7,065, is deductible, leaving $92,935 of net earnings. The SEP allows 20% of that, $18,587. The solo 401(k) allows the same $18,587 as employer plus $24,500 as employee, $43,087.

Three things fall out of the table:

• At small profits the deferral is almost everything. From about $26,000 of profit the whole $24,500 fits; below about $44,000 the employer share is squeezed, because total contributions cannot exceed what is left as compensation. At $30,000 the solo 401(k) total is $26,190, 4.7 times the SEP.
• In the middle the gap is exactly $24,500. From about $44,000 to about $252,000 of profit, the two employer shares are identical and the deferral is pure extra room.
• At the top they converge. The solo 401(k) reaches $72,000 near $252,000 of profit and the SEP near $376,000. Above that the only difference left is the catch-up.

If you are an S corporation owner, both plans work off your W-2 salary, not profit. On a $60,000 salary the SEP allows 25%, $15,000, and the solo 401(k) $15,000 plus $24,500, $39,500.

The original data

How many self-employed filers use these plans? The IRS Statistics of Income Table 1.4 for tax year 2023 counts 21,853,593 returns that deducted part of self-employment tax, a rough count of people with self-employment income. Only 946,019 returns took the deduction for self-employed SEP, SIMPLE and qualified plans (the table’s line called payments to a Keogh plan, which the SOI explanation of terms ties to Schedule 1 line 16), totaling $30.13 billion, an average of $31,850. That is 4.33 plan deductions per 100 self-employment returns, the same rate as tax year 2022.

61.0% of the returns taking the deduction had income of $200,000 or more. Read with care: the two counts are separate lines, so a return can appear in one and not the other; adjusted gross income includes a spouse’s wages and investment income; and the figures are IRS sample estimates. The line also lumps SEP, SIMPLE and solo 401(k) deductions together, so it cannot say which plan people chose.

What it does show is the gap the worked table explains. The group with the most to gain from a solo 401(k)’s deferral, people under $100,000, is the group least likely to use any plan: about 1 in 100.

Download the data: plan deductions by income group, 2026 maximums at nine profit levels and 2026 limits every $5,000 of profit. Each file is free to reuse with a credit and a link back, under the site license.

Deadlines, paperwork and the backdoor Roth

Set-up deadlines. Publication 560 says you can set up a SEP for a year as late as the due date, including extensions, of that year’s tax return, and its 2025 rules table gives the same set-up date for a defined contribution plan such as a 401(k). The catch is the employee deferral. A sole proprietor with no employees can adopt a new 401(k) after the year ends, but Pub 560 says the plan must be adopted, and that year’s deferrals paid to it, by the return’s due date without extensions. Leave it late and the solo 401(k) can lose its main advantage for the first year.

Annual filing. A SEP has no annual IRS return. The IRS says a one-participant 401(k) generally files Form 5500-EZ once it holds $250,000 or more at year-end.

The backdoor Roth problem. The Form 8606 instructions say “traditional IRA” includes traditional SEP IRAs. A pre-tax SEP balance therefore counts in the pro-rata math that taxes a backdoor Roth conversion; a solo 401(k) balance does not. See backdoor Roth for how that rule works.

Loans. The IRS allows a plan loan of the lesser of $50,000 or the greater of $10,000 and half your vested balance, repaid within five years, but only if the plan offers loans. The IRS also says loans are not permitted from IRAs or IRA-based plans such as SEPs.

Which one to use

Use the solo 401(k) when you have no employees and want to save more than about a fifth of your profit. On 2026 limits it allows more at every profit below about $376,000, it is the only one with catch-up contributions, and it keeps a backdoor Roth clean.

Use the SEP IRA when you have eligible employees or expect to hire. It can cover staff (age 21, three of the last five years, $800 of pay in 2026, per Pub 560), while a solo 401(k) stops being one once an eligible employee arrives. It is also the simpler choice when you only decide after the year ends, because a SEP has no separate deadline for a deferral.

Use the SEP IRA, too, when you only plan to save around 20% or less and want no plan document or 5500-EZ to track. Below that rate, the solo 401(k)’s extra room goes unused.

When it fails

The solo 401(k) fails when you hire. The IRS says eligible employees must be included and their deferrals tested; a plan run as “solo” after that is out of compliance.

The solo 401(k) fails on features the provider does not offer. Loans and Roth options are allowed by law, not promised by every provider. For example, Fidelity’s self-employed 401(k) page (read 7 Nov 2026) says loans, hardship withdrawals, in-plan Roth conversions and Roth employer contributions “are not offered at this time.” Read the plan terms before choosing it for one of those features.

The SEP fails at modest profits. At $50,000 of profit it caps you at $9,294, against $33,794 in the 401(k). Someone trying to catch up on retirement saving hits that limit quickly.

Both fail when the money is not invested. A plan only sets the limit; the traditional IRA and Roth IRA pages cover the tax side of what you put inside.

Questions people ask

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

You can, but Publication 560 says your contributions to all the defined contribution plans you maintain count together toward the overall limit ($72,000 for 2026), and a SEP counts as a defined contribution plan for this. A second plan adds paperwork without adding room.

Does a SEP IRA have a Roth option?

Yes, for tax years beginning after 2022: Publication 560 says a SEP IRA may be a traditional or a Roth SEP IRA. Not every provider offers one.

What is the 2026 solo 401(k) limit?

$72,000 in total, of which up to $24,500 is the employee deferral, plus $8,000 of catch-up at 50 or older or $11,250 at 60 to 63. Your profit decides how much of that you can use.

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

Yes. The IRS rollover chart allows a SEP IRA to roll into a pre-tax qualified plan such as a 401(k), if that plan accepts rollovers. It is also how people clear a SEP balance before a backdoor Roth. See IRA rollover.

Related

Why either plan is only a tax wrapper, and what goes inside it is a separate decision, is on retirement accounts. The 401(k) page covers how the plan itself works, and the traditional IRA page explains the pre-tax side a SEP shares. If a SEP balance is in the way of a Roth conversion, backdoor Roth and IRA rollover show the steps.

This page is educational, not financial advice. Test every idea on your own charts before risking money.