Solo 401(k) or SEP IRA? Retirement Accounts When You Work for Yourself
Key points
Both plans need earned income from your business. For an S corporation or C corporation owner, that means W-2 salary only, not shareholder distributions or dividends.
A solo 401(k) and a SEP IRA both allow up to $72,000 in contributions a year in 2026. At the same income, a solo 401(k) usually lets you put in more, because you contribute in two roles, as the employee and as the employer, and a spouse who works in the business can contribute too.
For a sole proprietor, the employer contribution is roughly 20% of net self-employment earnings after the deduction for half of self-employment tax.
A SEP IRA balance counts against you if you do a backdoor Roth IRA. A solo 401(k) balance doesn't.
A SEP IRA is simpler and can be set up up to the extended tax deadline, for any business structure. A solo 401(k) has more paperwork once assets pass $250,000.
I don't have a solo 401(k) or a SEP IRA myself yet. But living in the Bay Area, I have a lot of friends and clients who are startup founders, entrepreneurs, and freelancers. They often come to me with the same question: can I benefit from having a retirement account, and if so, how does it work?
This post doesn't cover every legal and tax nuance; those are worth working through with your CPA. My goal is to give you an idea of what's possible, how it may work, and whether it's something you want.
If you're self-employed, a freelancer, or running a one-person business, you don't have an employer 401(k) to default into. You choose your own plan. The two most common choices are a solo 401(k) and a SEP IRA. They have the same top limit, but the path to that limit, the Roth options, the deadlines, and the paperwork differ. Here's how each one works and how to think about which fits your situation.
Where This Fits
The general order is the same as for anyone else. A foundation first: an emergency fund and no high-interest debt. Then your retirement accounts, an HSA if you're eligible, and a taxable account for anything beyond that. What changes when you're self-employed is that you pick the retirement plan yourself. Whether money goes in as pre-tax or Roth is its own decision, covered in Roth vs Traditional: How to Decide When You Pay the Tax. Why tax-advantaged accounts are worth using at all is covered in Tax-Advantaged Accounts: Why Use Them Instead of a Regular Brokerage Account, and how a Roth 401(k) compares with a Roth IRA in Roth IRA or Roth 401(k)? How They Differ and Which One to Fund First.
Two Plans Built for the Self-Employed
Solo 401(k). Also called a one-participant 401(k). It's a regular 401(k) that covers a business owner with no employees, or the owner and their spouse. It has the same rules and requirements as any other 401(k) (IRS).
SEP IRA. A Simplified Employee Pension. The business makes contributions into an IRA in your name. It's funded by employer contributions only (IRS).
Both are available to sole proprietors, partnerships, LLCs, and corporations, including S corporations.
Who Can Contribute: You Need Earned Income
Both plans are built on earned income from your business, which the IRS calls compensation. Without it, there's nothing to base a contribution on, however profitable the business is on paper. What counts depends on how your business is set up:
Sole proprietor or single-member LLC: your net earnings from self-employment, meaning your business profit minus the deductible half of your self-employment tax.
S corporation: only the W-2 salary the corporation pays you. Shareholder distributions, the profits paid out to you as an owner, aren't earned income for retirement plans (IRS). Paying yourself a low salary and taking the rest as distributions saves payroll tax, but it also limits how much you can contribute.
Partnership or multi-member LLC: generally your net earnings from self-employment from the business, including guaranteed payments for the work you do (IRS). A general partner's share of the business's earnings counts; a limited partner's share generally doesn't, apart from guaranteed payments for services (IRC §1402).
C corporation, a common setup for startups: only your W-2 salary counts as compensation (IRS). Dividends are a return on your ownership, not pay for your work.
So a founder who takes no salary yet, in a business with no profit to report, can't contribute that year. And if your company has employees, a solo 401(k) isn't available, and a SEP IRA has to include eligible employees; founders of companies with staff usually use the company's regular 401(k). If you also earn separate freelance income outside your company, you may be able to open a plan on that income, but rules that link businesses under common ownership can apply, so confirm with your CPA. The same applies to IRAs: a contribution needs taxable compensation, and dividends and similar investment income don't qualify (IRS).
Each business structure has its own rules for what counts as compensation and how contributions are calculated, and this post gives only the general picture. Before you open or fund a plan, confirm with your CPA how these rules apply to your business.
Solo 401(k) vs SEP IRA: Side by Side
Contributions
Solo 401(k) | SEP IRA | |
|---|---|---|
Who can use it | A business owner with no employees other than a spouse | Any business; if you have eligible employees, they must get the same percentage you do |
How you contribute | Two roles: as the employee and as the employer | Employer contributions only |
Employee contributions (2026) | Up to $24,500, or 100% of compensation if lower | None |
Employer contributions | Up to 25% of compensation (about 20% of net self-employment earnings for a sole proprietor) | Same as the solo 401(k) |
Total contributions (2026) | $72,000 a year, or 100% of compensation if lower; catch-ups extra | $72,000 a year |
Catch-up at 50+ | $8,000 ($11,250 at ages 60–63), if the plan allows | None |
Roth option | Roth employee contributions, and Roth employer contributions, if the plan allows | Roth contributions, if the provider offers them; confirm before opening |
Rules and paperwork
Solo 401(k) | SEP IRA | |
|---|---|---|
Deadline to set up | By year-end for employee contributions. A new plan set up later, by the filing deadline including extensions, can take employer contributions only. Sole proprietors and single-member LLCs can also make first-year employee contributions if the plan is set up by the filing deadline without extensions | Up to the business's tax filing deadline, including extensions |
Deadline to contribute | Employee: elected by year-end; for self-employed owners, deposited by the tax filing deadline, including extensions. Employer: tax filing deadline, including extensions | Tax filing deadline, including extensions |
Loans | Allowed if the plan offers them | Not allowed |
Effect on a backdoor Roth IRA | None; 401(k) balances don't count in the pro-rata rule | The SEP IRA balance counts in the pro-rata rule |
Annual filing | Form 5500-EZ once all your one-participant plans together hold more than $250,000 | None |
Sources: IRS, One-participant 401(k) plans; IRS, SEP FAQs; IRS, 2026 limits; IRS Notice 2025-67; IRS Publication 560; IRS Notice 2024-2; IRS, Operating a 401(k) plan; IRS, Form 8606; SECURE 2.0 summary.
How Much Can You Put In?
The top limit is the same, $72,000 in contributions in 2026 (IRS). What differs is how quickly you get there.
When you work for yourself, you wear two hats. As the employee, you choose how much of your pay to contribute. As the employer, your business adds a contribution on top. Both are based on your compensation, as defined in the section above.
The employer contribution works the same way in both plans: up to 25% of compensation. For a sole proprietor or single-member LLC, the 25% becomes about 20%: roughly 20% × (net profit − half of your self-employment tax). The rate is lower because the contribution itself reduces the base it's calculated on (IRS). Only the first $360,000 of compensation counts in 2026 (IRS). If your business is an S corporation paying you a salary, the employer contribution is 25% of that W-2 salary instead.
The employee contribution exists only in the solo 401(k). You can put in up to $24,500 in 2026, as long as it doesn't exceed your compensation (IRS).
Here's an example for a sole proprietor with $100,000 of net profit in 2026, before age 50:
Self-employment tax is about $14,130, and half of it, about $7,065, is deductible. That leaves about $92,935 as the base.
Employer contribution: about 20% of that base, or roughly $18,590. This is the maximum for a SEP IRA.
Solo 401(k): the same $18,590 as the employer, plus up to $24,500 as the employee, for roughly $43,090.
Illustrative figures, rounded. The exact calculation uses the worksheets in IRS Publication 560, and the result depends on your full tax picture.
At lower and middle incomes, the solo 401(k) usually allows much more, because the employee contribution isn't tied to a percentage. The gap closes only at high incomes. As simple arithmetic, a solo 401(k) can reach the $72,000 limit at about $237,500 of compensation ($72,000 − $24,500, divided by 20%), while a SEP IRA needs about $360,000 (20% × $360,000). Compensation here means net earnings after the self-employment tax deduction. For an S corporation owner, where the employer rate is the full 25% of W-2 salary, the same points are about $190,000 and $288,000 of salary.
Deadlines and Timing
This is where the two plans differ in practice.
SEP IRA. You can set up the plan and make the contribution for a tax year up to the business's tax filing deadline, including extensions (IRS). That lets you wait until you know your final profit for the year.
Solo 401(k), employer contribution. Can be made up to the business's tax filing deadline, including extensions (IRS).
Solo 401(k), employee contribution. For an existing plan, it has to be elected by year-end. Self-employed owners can then deposit it by the tax filing deadline, including extensions (IRS). If you're paid W-2 wages, it comes out of your paychecks.
A new solo 401(k) after year-end. Since SECURE 2.0 (section 317), a sole proprietor or single-member LLC owner can set up a first solo 401(k) after the year ends and still make employee contributions for that first year, if the plan is set up and funded by the personal tax return due date, without extensions, usually April 15 (SECURE 2.0 summary). S corporation owners and partnerships aren't covered by this exception.
What this means in practice:
S corporation owners and partners: to make employee contributions for this year, open the solo 401(k) before December 31.
Sole proprietors and single-member LLC owners: you can open it by April 15 and still contribute for the prior year, but only in the plan's first year. Opening before December 31 keeps the most options open.
The Details That Often Decide It
The backdoor Roth IRA
If your income is above the Roth IRA limits and you use a backdoor Roth IRA, this can decide the choice on its own. The pro-rata rule looks at all your pre-tax money in traditional, SEP, and SIMPLE IRAs as of December 31 of the year you convert (IRS). A SEP IRA balance makes part of every backdoor conversion taxable. A solo 401(k) balance doesn't count. Many solo 401(k) plans also accept rollovers of pre-tax IRA money, which can clear the way for a backdoor Roth, though that depends on the plan. I walk through the backdoor and the pro-rata rule in The Backdoor Roth IRA: Why I Use It and How It Works, Step by Step.
Roth options
Both plans can now offer Roth. A solo 401(k) can allow Roth employee contributions, and since SECURE 2.0, Roth employer contributions (IRS). A SEP can allow its contributions to go into a Roth IRA instead of a traditional one (IRS). In both cases, a Roth employer contribution is taxable income to you in the year it's made. Not every provider offers these options yet, so confirm before you open an account. Whether Roth makes sense for you is covered in Roth vs Traditional.
Catch-up contributions and the 2026 Roth rule
A solo 401(k) allows catch-up contributions at 50 and older, if the plan offers them: $8,000 in 2026, or $11,250 at ages 60–63 (IRS). A SEP IRA has no catch-up contributions (IRS).
The 2026 rule requiring catch-ups to go in as Roth applies to people who earned more than $150,000 in FICA wages from the employer sponsoring the plan in the previous year (IRS). It's based on W-2 wages. A sole proprietor whose income is only self-employment income generally isn't subject to it. An S corporation owner paid a W-2 salary above the threshold can be.
Employees
A solo 401(k) works while you have no employees other than a spouse (IRS). Once you hire employees who become eligible under the plan's rules, it turns into a regular 401(k), with more rules and testing. A SEP IRA can cover employees, but each eligible employee has to receive the same percentage of compensation that you give yourself (IRS). If you plan to hire, factor that in. Your spouse can participate in a solo 401(k) if they work in the business.
Paperwork
A SEP IRA has no annual filing. A solo 401(k) has to file Form 5500-EZ once the assets in all your one-participant plans together are above $250,000 at the end of the year, and a final one in the year the plan ends, whatever the balance (IRS). Missing it can be expensive: the IRS can charge $250 a day, up to $150,000 a year, though it has a relief program for late filers (IRS). Put it on your financial calendar.
Access to the money
A solo 401(k) follows the same withdrawal rules as any 401(k). Employee contributions generally can't be paid out before you reach 59½, stop working in the business, become disabled, or face a hardship (IRS). A solo 401(k) can offer loans; how they work, and their risks, are covered in Borrowing From Your 401(k): How a 401(k) Loan Works and When It Makes Sense. A SEP IRA follows IRA rules: no loans, but no plan-level restrictions on withdrawals either. Taxes and the 10% early-withdrawal penalty still apply in both cases.
Protection from creditors
A solo 401(k) isn't covered by ERISA, the federal law that protects most employer plans from creditors, because it has no employees. In bankruptcy, both a solo 401(k) and a SEP IRA are protected under federal law, and the dollar cap that applies to other IRA money doesn't apply to SEP IRAs (federal bankruptcy law, 11 U.S.C. §522(b)(3)(C) and (n)). Outside bankruptcy, protection for both depends on your state's law.
If You Also Have a W-2 Job
Many self-employed people also have a regular job with a 401(k). The employee contribution limit is per person, not per plan. Your employee contributions to all your 401(k)s together can't exceed $24,500 in 2026 (IRS). If you max out your employee contributions at work, a solo 401(k) only adds room through the employer contribution, which a SEP IRA also offers.
The total limit works differently. The $72,000 limit applies per employer, so if your business is unrelated to the company you work for, each plan has its own $72,000 (IRS). Contributions at your day job, including any mega backdoor contributions there, don't reduce the room in your solo 401(k). What you can actually put in as the employer is still capped by your self-employment income, at about 20% of net earnings. Catch-up contributions, if you're 50 or older, are per person too, and you can split them between the plans (IRS).
How to Think About It
There's no plan that's right for everyone. Here's how I'd frame the choice:
If you want to put away as much as possible at a moderate self-employment income, the solo 401(k)'s employee contribution usually makes the bigger difference.
If you use or plan to use a backdoor Roth IRA, a SEP IRA balance works against you.
If you want the least paperwork, or you're deciding after the year has ended, the SEP IRA is simpler.
If you have or plan to have employees, a solo 401(k) turns into a regular 401(k) once they're eligible, and a SEP IRA requires contributions for them too.
If you're 50 or older, only the solo 401(k) allows catch-up contributions.
If you want Roth contributions, check which options your provider actually offers.
These two plans aren't the only choices. Self-employed people who want to save more than these limits sometimes add a defined benefit or cash balance plan, which is more complex and usually set up with professional help.
Summary
A solo 401(k) and a SEP IRA both let a self-employed person contribute up to $72,000 a year in 2026, but the solo 401(k) usually allows more at the same income, adds catch-ups after 50, and stays out of the pro-rata rule for a backdoor Roth IRA. The SEP IRA is simpler, with no annual filing, and any business can set it up and fund it up to the extended tax deadline.
FAQs
What's the contribution limit for a solo 401(k) and a SEP IRA in 2026? Both have a total contribution limit of $72,000 (IRS). In a solo 401(k), up to $24,500 of that can be employee contributions, plus catch-ups if you're 50 or older (IRS). In a SEP IRA, it's all employer contributions, with no catch-ups (IRS).
Why is the self-employed employer contribution about 20%, not 25%? For a self-employed person, compensation is net self-employment earnings after the deduction for half of self-employment tax, and the contribution itself reduces that base. The result is a reduced rate of about 20% (IRS).
Can I open a SEP IRA after the year ends? Yes. A SEP IRA can be set up and funded up to the business's tax filing deadline, including extensions (IRS).
Can I have a solo 401(k) if I also have a 401(k) at my day job? Yes, but your employee contribution limit of $24,500 in 2026 is shared across both plans (IRS).
Does a SEP IRA affect a backdoor Roth IRA? Yes. SEP IRA balances count in the pro-rata calculation on Form 8606, which makes part of a backdoor conversion taxable (IRS). Solo 401(k) balances don't count.
Can I contribute based on my S corporation distributions? No. Only the W-2 salary your S corporation pays you counts. Shareholder distributions aren't earned income for retirement plans (IRS).
Do I have to file anything for a solo 401(k)? Form 5500-EZ, once the assets in all your one-participant plans together are above $250,000 at the end of the year, and a final one when the plan ends (IRS).
Transparency Note: I'm the human behind the keyboard — the ideas, stories, and decisions here are mine. I collaborate with AI throughout the writing process: brainstorming, drafting, smoothing out grammar and flow, assisting with research, and creating the visuals you see throughout my posts.
Disclaimer: The information provided in this blog post is for educational and informational purposes only. I am an AFC® (Accredited Financial Counselor) Candidate, not a Certified Financial Planner (CFP®), Certified Public Accountant (CPA), tax advisor, attorney, or Investment Adviser Representative (IAR). The content herein is not intended to be a substitute for investment, tax, or legal advice from a licensed professional. Always seek the advice of a qualified professional with any questions you may have regarding your individual financial situation. The opinions expressed are my own and do not represent the views of my current or former employer.
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