SEP IRA vs Solo 401(k)
Last updated August 2026
Short answer
For a freelancer earning less than about $200,000, this is not a close comparison on contribution room. It is closer than it looks on everything else.
How each is calculated
A SEP contribution is up to 25% of compensation, which for a sole proprietor works out at 20% of net self-employment income after deducting half of self-employment tax.
A Solo 401(k) allows the same employer percentage plus an employee deferral of $24,500, with the combined figure capped at $72,000.
Catch-up contributions of $8,000, or $11,250 at ages 60 to 63, sit above that cap in the Solo 401(k) and do not exist in a SEP.
Where the gap is widest
At low and moderate income, because the deferral does not depend on profit at all.
At $60,000 of net earnings, the SEP allows roughly $11,000 and the Solo 401(k) allows that plus a deferral limited only by your compensation.
The two converge above roughly $200,000, where both approach the same annual additions ceiling.
What the SEP wins
Setup is a single IRS form most custodians handle in minutes.
There is no Form 5500 obligation at any asset level, whereas a Solo 401(k) requires 5500-EZ once assets pass $250,000.
The deadline is the strongest advantage: a SEP can be created and funded after the tax year ends, up to the filing deadline including extensions.
Try it in Walnut
Walnut connects to your brokerage and reads a SEP or Solo 401(k) at a mainstream custodian alongside your other accounts.
Employees change the answer
A SEP requires the same percentage of compensation for every eligible employee, with no vesting schedule to soften it.
A Solo 401(k) simply stops being available once someone else becomes an eligible participant.
At that point a SIMPLE IRA or a conventional 401(k) is usually cheaper, because employees fund part of their own accounts.
A practical rule
Self-employed with no employees and income under roughly $200,000: the Solo 401(k), for the deferral.
Realising in March that you need a deduction for last year: the SEP, because it is the only one you can still open.
Planning to hire: neither, and setting up the plan you will still be able to use in two years saves an unwinding later.
Loans and other differences
A Solo 401(k) may permit loans, up to the lesser of $50,000 or half the vested balance, where the plan document allows it.
A SEP IRA never permits loans, because IRAs cannot lend to their owners at all.
Neither should be treated as a source of borrowing, and the difference matters mainly to somebody weighing plan features rather than planning to use one.
Sources
The 2026 deferral, catch-up, $72,000 annual additions and $360,000 compensation figures are from IRS Notice 2025-67. Contribution calculations and plan requirements are in Publication 560, with one-participant plan rules at One-participant 401(k) plans. Walnut is informational and is not an investment adviser. This guide is educational and not personalized tax advice.
FAQ
Which allows a bigger contribution?
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The Solo 401(k), at any income below the cap, because it adds a $24,500 employee deferral to the same employer percentage a SEP uses. The two converge only at high income, where both hit the $72,000 annual additions limit for 2026.
How big is the difference at $60,000 of profit?
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Substantial. A SEP allows roughly $11,000, being about 20% of adjusted net earnings. A Solo 401(k) allows that employer amount plus the $24,500 deferral, subject to not exceeding total compensation.
Which is simpler?
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The SEP, clearly. No plan document to maintain beyond a one-page form, no annual filing at any size, and the account can be opened after the tax year has ended.
What about the catch-up at 50?
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Only the Solo 401(k) has one: $8,000 from age 50 and $11,250 at ages 60 to 63, and those sit above the $72,000 cap. A SEP has no catch-up at all.
Which is better if I have employees?
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Neither, in most cases. A SEP requires the same percentage for every eligible employee, and a Solo 401(k) stops being solo. A SIMPLE IRA or a conventional 401(k) is usually the answer.
Can I have both?
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Technically possible in some structures, though the annual additions limit applies across plans of the same employer, so it rarely produces extra room. Most people are better off choosing one and funding it properly.
Which has the later deadline?
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The SEP. It can be established and funded up to the business tax filing deadline including extensions, which reaches October for a sole proprietor who extends. A Solo 401(k) generally has to exist earlier.
Does either allow Roth contributions?
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The Solo 401(k) reliably does for employee deferrals, and SECURE 2.0 extends Roth treatment to employer contributions where the plan supports it. Roth SEP contributions are permitted but provider adoption is patchy.
Can I borrow from either?
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A Solo 401(k) may permit loans up to the lesser of $50,000 or half the vested balance, where the plan document allows it. A SEP IRA never can, because an IRA cannot lend to its owner.
Which is better if my income varies a lot?
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The SEP, on flexibility, because both the amount and the decision itself can wait until after the year ends. A Solo 401(k) generally needs to exist during the year for the employee deferral, even though the employer part can wait.