Solo 401k vs SEP IRA: Complete Guide
You've been running your own shop for years—maybe you're an electrician who went solo, a nurse practitioner with your own practice, or a trucker who bought your own rig. You know there are tax-advantaged ways to save for retirement, but which one actually lets you keep more of what you've earned? Let's break it down.
Quick Verdict
Solo 401k wins for most self-employed individuals because it allows higher contributions at lower income levels, offers Roth contributions, and includes loan provisions. SEP IRA is simpler to set up but lacks these key features.
Head-to-Head Comparison
See exactly how these two retirement plans stack up across key features.
| Feature | Solo 401k | SEP IRA |
|---|---|---|
| 2026 Max Contribution | $70,000 ($77,500 if 50+) | $70,000 |
| Employee Deferral | $23,500 | None |
| Catch-Up Contributions (50+) | $7,500 | None |
| Roth Contributions | Yes | No |
| Loan Provision | Up to $50K | Not Allowed |
| Setup Complexity | Moderate | Simple |
| Annual Filing Required | Form 5500-EZ (if >$250K) | None |
| Can Have Employees | No (except spouse) | Yes (must cover all) |
| Best For | Max savings, flexibility | Simplicity, businesses with employees |
Contribution Limits by Income Level
The Solo 401k advantage is most significant at lower and moderate income levels.
* Calculations for self-employed individuals under 50. Solo 401k includes $23,500 employee deferral + 20% employer contribution.
Key Differences Explained
Contribution Structure
Solo 401k
Allows two types of contributions: employee deferrals (up to $23,500) plus employer profit-sharing (up to 25% of compensation). This dual structure is why you can save more at lower income levels.
SEP IRA
Only allows employer contributions (up to 25% of compensation or ~20% of net SE income). No employee deferral option means you need much higher income to maximize contributions.
Roth Contributions
Solo 401k
Roth option available. Your employee deferrals ($23,500) can be designated as Roth contributions, growing tax-free and providing tax-free withdrawals in retirement.
SEP IRA
No Roth option. All SEP IRA contributions are pre-tax only. If you want Roth benefits, you'd need a separate Roth IRA (with its lower $7,000 limit).
Loan Provision
Solo 401k
Loans allowed. Borrow up to 50% of your vested balance (max $50,000) without taxes or penalties. Great for accessing funds in emergencies while keeping your retirement on track.
SEP IRA
Loans not permitted. Any withdrawal before age 59½ triggers income taxes plus a 10% early withdrawal penalty (with limited exceptions).
Having Employees
Solo 401k
Solo owners only. You cannot have employees (other than a spouse). If you hire employees, you'll need to convert to a traditional 401k or use a different plan.
SEP IRA
Can have employees. However, you must provide the same contribution percentage to all eligible employees. If you contribute 20% for yourself, employees get 20% too.
Which Plan Is Right For You?
Choose Solo 401k If...
- You want to maximize contributions at lower income levels
- You want Roth contribution options for tax-free growth
- You value the ability to take loans from your retirement funds
- You're 50 or older and want catch-up contributions
- You have no employees (or only a spouse)
Can You Have Both a Solo 401k and SEP IRA?
Technically yes, but it rarely makes sense. If you have both plans for the same business, your total employer contributions across both plans are limited to 25% of compensation. You don't get double the employer contribution limit.
When it might make sense:
- • You have two separate businesses - one with employees (SEP) and one solo (Solo 401k)
- • You're transitioning from a SEP IRA to a Solo 401k
- • You want to consolidate old SEP funds into a Solo 401k