Guide·Updated October 20, 2026

Solo 401(k) vs. SEP IRA: Same Cap, Very Different Ceilings

Both plans top out at $72,000 for 2026. Below the top, one of them lets a self-employed earner shelter more than twice as much. Here is the math.

The 2026 Limits

IRS Notice 2025-67 sets the 2026 numbers. The overall defined-contribution cap, which applies to both plans, rises to $72,000. The elective deferral limit, the "employee" part of a 401(k), is $24,500. If you are 50 or older, a solo 401(k) adds an $8,000 catch-up (total $80,000), or $11,250 if you turn 60, 61, 62 or 63 in 2026 (total $83,250). Contributions can only be based on compensation up to $360,000. A SEP IRA has no catch-up and no employee deferral: it is employer money only, limited to 25% of compensation. For a sole proprietor that works out to 20% of net self-employment earnings after the deduction for half of SE tax.

Employee vs. Employer Contributions

A self-employed person is both the employer and the employee, and a solo 401(k) lets you contribute in both roles: up to $24,500 as the employee, plus an employer contribution of 20% of net self-employment earnings. A SEP only allows the employer contribution. Take $100,000 of Schedule C profit. Self-employment tax is $14,129.55, half of it ($7,064.78) is deductible, which leaves $92,935.22 of compensation. The employer contribution is 20% of that, about $18,587, and that is the entire SEP limit. The solo 401(k) allows the same $18,587 plus the $24,500 deferral: $43,087, 2.3 times as much. At $60,000 of profit the gap is about $11,152 against $35,652.

The Roth Option

Your solo 401(k) deferrals can be traditional (deducted now) or Roth (taxed now, tax-free later) if the plan document allows Roth. SECURE 2.0 also lets employer contributions to 401(k)s and SEPs be designated Roth, and IRS Publication 560 confirms SEP contributions can go into a Roth SEP IRA. Whether you can use any of this depends on your provider: the IRS allows Roth contributions, but plans are not required to offer them, and some providers still don't. The trade-off is the same as anywhere: take the deduction now if your marginal rate is high and likely to fall, and use Roth in lean or early-career years when your bracket is low.

Deadlines and Paperwork

A SEP is the most forgiving plan there is. You can open it and fund it up to your tax filing deadline including extensions, so a 2026 SEP can be opened in September 2027 on an extended return. A solo 401(k) is less forgiving. Since 2023, a sole proprietor with no employees can adopt a new 401(k) after year-end, but only until the filing deadline without extensions. Open it before December 31 to keep every option for the year, because the plan document controls how your deferral elections work. The 401(k) also has a reporting requirement: once plan assets reach $250,000 at year-end, you file Form 5500-EZ every year. A SEP has no annual filing.

Which Should You Choose?

For most solo operators, the solo 401(k) wins. Below roughly $252,000 of Schedule C profit (under age 50), the employee deferral lets you shelter far more than a SEP can. The SEP does not reach the $72,000 cap until about $376,000 of profit, the point where compensation reaches the $360,000 limit. Choose the SEP when simplicity matters more than room: no Form 5500-EZ, and you can still open it after you know the year's numbers. The deciding constraint is staff. A solo 401(k) is only for an owner with no employees other than a spouse. A SEP must contribute the same percentage for every eligible employee, so hiring changes the math either way.

Put This Into Practice

Apply what you've learned using the WealthWise tool built for this exact purpose.

See How Bigger Contributions Move Your FIRE Date

Frequently Asked Questions

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

You can hold both accounts, but the $72,000 cap for 2026 applies across all defined-contribution plans of the same business, so a second plan adds paperwork, not room. Most people pick one. If you already have a SEP, you can stop funding it and open a solo 401(k) for the bigger employee deferral.

I have a 401(k) at my day job. Can I still open a solo 401(k)?

Yes, but the $24,500 employee deferral limit for 2026 is per person, not per plan, so deferrals at your day job reduce what you can defer to the solo plan. The employer contribution from your side business (20% of net self-employment earnings) is separate and still available.

What is the deadline to contribute for 2026?

For a SEP, the 2026 tax filing deadline including extensions, for both opening the account and funding it. For a solo 401(k), employer contributions are also due by the filing deadline including extensions. A brand-new plan for a sole proprietor must be adopted by the filing deadline without extensions. Open it in 2026 if you can.

Does a SEP IRA allow catch-up contributions?

No. A SEP is funded only by employer contributions and has no age-50 catch-up. Under the solo 401(k), people 50 and over can add $8,000 for 2026, and those turning 60 to 63 in 2026 can add $11,250, which is one more reason older self-employed earners usually prefer the 401(k).

Sources

Limits and thresholds change every year. Confirm against the current publication.