Solo 401(k) vs. SEP-IRA: How Solopreneurs Should Choose

If you’re a self-employed business owner with no full-time employees (often called a solopreneur), two of the most common retirement plans to consider are the solo 401(k) and the SEP-IRA.

Both plans allow solopreneurs to save for retirement on a tax-advantaged basis. However, they operate differently — and those differences can affect how much you can contribute, how contributions are taxed, and how flexible the plan is over time.

Understanding how each plan works can help you determine which approach best fits your business and long-term retirement goals.

Solo 401(k) Plans vs. SEP-IRAs: How the Plans Compare

Before comparing the advantages of each plan, it helps to understand how solo 401(k) plans and SEP-IRAs are structured. While both are designed for small businesses and self-employed individuals, they differ in how contributions are made, what features they offer, and how much flexibility they provide.

What is a Solo 401(k) Plan?

A solo 401(k) plan, also called a one-participant 401(k) or individual 401(k), is a retirement plan designed for businesses with no employees other than the owner and possibly the owner’s spouse.

Because the plan covers only owners, it is exempt from many requirements that apply to traditional 401(k) plans. For example, nondiscrimination testing is unnecessary because there are no non-owner employees to protect.

Solo 401(k) plans can include many features found in standard 401(k) plans, including:

• Employee elective deferrals
• Employer contributions
• Voluntary after-tax contributions
• Catch-up contributions
• Roth contribution options
• Participant loans

What is a SEP-IRA?

A Simplified Employee Pension (SEP) allows employers to contribute to traditional IRAs established for employees.

Under a SEP-IRA:

• Only employer contributions are allowed (employees cannot defer salary).
• Contributions are typically made as a percentage of compensation.
• If employees are covered, the same percentage of compensation must be contributed for all eligible employees.

SEP-IRAs are popular because they are easy to establish, require minimal paperwork, and have no annual IRS filing requirements.

Major Differences Between the Plans

The table below summarizes several key differences between solo 401(k) plans and SEP-IRAs.

These structural differences help explain why solo 401(k) plans often offer greater flexibility and contribution potential, while SEP-IRAs emphasize simplicity.

Advantages of a Solo 401(k) Plan

Solo 401(k) plans provide several features that SEP-IRAs do not, particularly when it comes to maximizing retirement contributions and flexibility.

Higher Contribution Limits

The 415(c) limit caps total annual contributions (“annual additions”) to defined contribution plans.

For 2026, the 415(c) limit is the lesser of:

• $72,000, or
• 100% of the participant’s compensation

Although both plans share this ceiling, other rules — particularly catch-up contributions and deduction limits — can allow solo 401(k) participants to contribute more.

Impact of Catch-Up Contributions

Solo 401(k) plans may allow catch-up contributions, which permit participants age 50 or older to contribute additional elective deferrals beyond the standard 402(g) limit.

For 2026, the catch-up limits depend on the participant’s age:

• Age 50–59 or 64 and older: additional $8,000
• Age 60–63: additional $11,250 under the SECURE 2.0 enhanced catch-up rule

SEP-IRAs do not allow catch-up contributions.

Impact of Contribution Deductibility Limits

The 404 deduction limit restricts how much an employer can deduct for retirement plan contributions.

Employer contributions are generally deductible up to 25% of compensation, while employee elective deferrals do not count toward this limit.

Because employee contributions are not subject to the 25% employer deduction limit, solo 401(k) plans can often allow larger total contributions than a SEP-IRA.

Maximum Deductible Contribution by Income (2026)

The following examples illustrate how this rule affects the maximum deductible contributions under each plan at different income levels, assuming the business owner:

• • Is under age 50
  • Maximizes elective deferrals to the solo 401(k) at the 402(g) limit
  • Contributes the largest deductible employer contribution permitted under 404, subject to the 415(c) limit

*Limited by the §415(c) annual addition limit ($72,000 in 2026).

Roth Contributions

Solo 401(k)s can allow Roth contributions, while SEP-IRAs cannot.

Roth contributions are made with after-tax dollars, so their principal can be withdrawn tax-free. Earnings can also be withdrawn tax-free when part of a “qualified distribution” in retirement.

For business owners seeking tax diversification in retirement, this feature can be valuable.

Participant Loans

Solo 401(k)s can allow participant loans - which allow participants to borrow from their account balance and repay the loan with interest – while SEP-IRAs cannot.

While retirement loans should be used cautiously, some business owners value having this flexibility.

Voluntary After-Tax Contributions

Solo 401(k) plans can allow voluntary contributions, while SEP-IRAs cannot. Employees make voluntary contributions on an after-tax basis like Roth contributions. However, their earnings are always taxable upon withdrawal.

Despite this limitation, many solo plans allow voluntary after-tax contributions due to their role in a tax strategy commonly known as the mega backdoor Roth.

How the Mega Backdoor Roth Strategy Works

Under the mega backdoor Roth strategy, an individual makes voluntary after-tax contributions to a 401(k) plan – up to the 415(c) limit - and then converts those contributions to a Roth account, allowing future investment earnings to grow tax-free.

Advantages of a SEP-IRA

Although solo 401(k) plans offer more features, SEP-IRAs have advantages of their own.

Administrative Simplicity

Plan administration refers to the paperwork, reporting requirements, and ongoing compliance responsibilities involved in maintaining a retirement plan.

While solo 401(k)s require much less administration than a traditional 401(k), SEP-IRAs require even less.

SEP-IRA Administration

• Simple setup
• Minimal paperwork
• No annual IRS filing requirements

Solo 401(k) Administration

• A formal plan document is required
• Form 5500-EZ must be filed once plan assets exceed $250,000

More Flexible Distribution Rules

The distribution rules for solo 401(k) plans and SEP-IRAs are similar in several respects. Both allow rollovers to other retirement plans or IRAs and require required minimum distributions (RMDs) beginning at age 73.

However, SEP-IRAs can provide greater flexibility for early withdrawals.

Distributions before age 59½ are generally subject to income tax and a 10% penalty. Because SEP-IRAs follow standard IRA rules, they allow several penalty exceptions that are not always available for 401(k) plans, including withdrawals for:

• First-time home purchases
• Qualified education expenses
• Health insurance during unemployment

These exceptions can make SEP-IRAs more flexible if funds must be accessed before retirement.

When to Choose a Solo 401(k) Plan

A solo 401(k) is often the better choice when maximizing retirement savings is the priority.

Consider a solo 401(k) if:

• You want to maximize retirement contributions
• Your income is moderate rather than extremely high
• You want Roth contribution options
• You value the flexibility of participant loans
• You want to use the mega backdoor Roth strategy
• Your business has no employees

When a SEP-IRA May Be Preferable

A SEP-IRA may be preferable when simplicity and minimal administration are the primary goals.

Consider a SEP-IRA if:

• You want the simplest retirement plan possible
• You prefer minimal paperwork and administrative requirements
• You do not need the additional features offered by a solo 401(k)
• You prefer the distribution flexibility of IRA rules

The Bottom Line

Both solo 401(k)s and SEP-IRAs can provide meaningful tax benefits and retirement savings opportunities for solopreneurs.

However, because of the ability to make employee contributions in addition to employer contributions, solo 401(k)s often allow business owners to save significantly more.

SEP-IRAs remain attractive for their simplicity, but many self-employed individuals find that the flexibility and higher contribution potential of a solo 401(k) make it the stronger long-term option.