Solo 401k vs SEP IRA: Which One Fits a One Person Business

If you work for yourself and you are choosing a retirement plan, the solo 401k vs SEP IRA decision comes down to two things: how much profit you make, and whether you will ever hire anybody. The tax treatment is identical. The paperwork and the ceiling are not.

Here are the 2026 numbers, straight from the IRS, and the point where the answer changes.

What Each One Lets You Put In

Both plans stop at the same ceiling. For 2026 the total that can go into either is $72,000, up from $70,000. They reach it very differently.

A SEP IRA has one contribution type: employer money, capped at 25 percent of compensation. For a sole proprietor, after the self-employment tax adjustment, that works out at an effective 20 percent of net earnings. To hit $72,000 you need roughly $360,000 of net profit, which is also the compensation limit for 2026.

A solo 401(k) has two. You contribute as an employee first, up to $24,500 for 2026, and that part is a flat amount rather than a percentage of anything. Then you add the employer contribution on top, up to the same 25 percent. Catch-up is $8,000 from age 50, and $11,250 for ages 60 to 63, which replaces the $8,000 instead of adding to it. At 50 or over the practical maximum is $80,000, and between 60 and 63 it is $83,250.

That structural difference is the whole argument at most income levels. On $100,000 of net profit, a SEP allows about $20,000. A solo 401(k) allows the $24,500 deferral plus the same $20,000, so roughly $44,500. Same person, same profit, more than double the shelter.

The gap narrows as income rises and disappears around $290,000 of net profit, where the percentage alone reaches the cap. Above that, both plans put the same money away and the deferral stops mattering.

The Same Profit, Three Different Outcomes

Round numbers, one person, no employees, using the effective 20 percent rate the IRS tables produce for the self-employed.

$60,000 of net profit. SEP allows roughly $12,000. Solo 401(k) allows roughly $36,500, because the $24,500 deferral sits on top. Three times the shelter at the income level where the difference matters most.

$150,000 of net profit. SEP allows roughly $30,000. Solo 401(k) allows roughly $54,500.

$300,000 of net profit. SEP allows roughly $60,000. Solo 401(k) reaches the $72,000 ceiling. The gap has closed to a point where the SEP’s simplicity is a live argument.

One more feature only the 401(k) has: a spouse genuinely working in the business can be on the payroll and make their own deferral, which puts a second $24,500 into the household. That is worth more than any of the differences above and it depends on the work being real.

Solo 401k vs SEP IRA on Paperwork

This is where the SEP earns its place.

A SEP IRA files nothing. Ever. No annual return, no asset threshold, no deadline to miss.

A solo 401(k) files nothing until combined plan assets pass $250,000 at year end. After that, Form 5500-EZ is due by 31 July for a calendar-year plan, with an extension to 15 October if you file for one. It is a short form and most providers will prepare it, but it is a recurring obligation with a penalty attached, and it arrives precisely when the plan has started working.

Opening a SEP takes an afternoon. Opening a solo 401(k) takes a plan document and a provider that supports the features you want.

The Things Only One of Them Does

Borrowing. A solo 401(k) may allow a participant loan of up to the lesser of 50 percent of the vested balance or $50,000, repayable over five years with at least quarterly payments. IRA-based plans, including SEPs, cannot offer loans at all. For a business owner whose cash flow is lumpy, that is a real difference, though borrowing from your own retirement account is a decision to make on a good day rather than a bad one.

Roth. Both can now be Roth, which surprises people. SECURE 2.0 allowed Roth SEP contributions for tax years after 2022, and separately allowed employer contributions in a 401(k) to be designated Roth provided they are fully vested when made. In a solo 401(k) that means the entire $72,000 can in principle be Roth money. Statutory availability is not the same as provider availability, so ask before you assume your custodian offers it.

The high earner catch-up rule. From the 2027 tax year, participants with more than $150,000 of FICA wages from the sponsoring employer in the previous year must make catch-up contributions as Roth. The final regulations exempt individuals with no FICA wages, which includes a sole proprietor whose income is all self-employment income however large it is. An S-corp owner paying himself a W-2 salary above the threshold is inside the rule. A SEP is outside it entirely, since SEPs have no catch-up.

The Day You Hire Somebody

This is the question that decides it for anyone planning to grow, and it is usually asked too late.

A SEP must cover every employee who is 21 or older, has worked for you in three of the last five years, and earned at least $800 in the year. Cover means the same percentage for them as you take for yourself. If you are putting away 20 percent of your own compensation, you are putting 20 percent of theirs in too. On a $60,000 salary that is $12,000, per employee, per year.

A solo 401(k) does something different. It stops being a solo 401(k). The moment a non-spouse employee becomes eligible, the exemption from nondiscrimination testing disappears and the plan has to be administered as a real 401(k), usually as a safe harbor plan with a matching obligation and a third party running it.

A spouse on the payroll does not break it, and in fact doubles the household deferral. Anyone else does.

Neither outcome is a disaster and both are expensive surprises. If a first hire is plausible within three years, price that scenario before you open either plan.

The Deadlines Are Not the Same

A SEP can be opened and funded as late as the due date of your tax return including extensions. For 2026 that means as late as October 2027 for a sole proprietor who extends.

A solo 401(k) can be adopted after the year ends, under a SECURE 2.0 change, but only by the tax filing deadline without regard to extensions. Around mid-April the retroactive route closes and the SEP is the only one still open.

That asymmetry has a practical consequence every year. A profitable year discovered late is a SEP year, whatever the arithmetic above says.

The Mistake Almost Everyone Makes on the Maths

The plan documents say 25 percent of compensation. Self-employed people read that, apply 25 percent to their net profit and over-contribute, which is a correctable error that costs time and sometimes a penalty.

For a sole proprietor, compensation means net earnings after the deduction for half of self-employment tax and after the contribution itself, which is circular. The IRS resolves it with a rate table, and a 25 percent plan rate becomes an effective 20 percent of net earnings. On $150,000 of profit that is the difference between $37,500 and about $30,000.

The same reduced rate applies to both plans, so it changes the ceiling rather than the comparison. Run it before deciding how much you can afford to put away, because the number you have in your head is probably a quarter too high.

The Decision, Compressed

Net profit under roughly $290,000, no employees planned, and you want the largest possible deduction: solo 401(k). The flat deferral is worth thousands a year that a SEP structurally cannot match, and you file nothing until the balance passes $250,000.

Employees likely within a few years, or profit consistently above $290,000, or you value never filing anything: SEP IRA. At high income the contribution ceilings converge and the SEP wins on simplicity alone.

Late to the year with no plan open: SEP IRA, because it is the one you can still start.

One warning that applies to both, and it is the part people underestimate. These are long commitments dressed as annual decisions. The contribution you can afford in a good year becomes a habit you have to sustain through a bad one, and plans get abandoned in exactly the way whole life policies get surrendered: not by a decision, but by a difficult twelve months in which the payment is the easiest line to stop.

Build the contribution around your worst plausible year rather than your best. The solo 401k vs SEP IRA question is really a question about which structure you will still be funding in a decade, and the plan you keep beats the plan with the higher ceiling. Setting the number once, correctly, also takes it off the list of things you re-decide every quarter, which is its own small return in a week that already has too many open decisions in it.