Both the Solo 401(k) and the SEP-IRA let a self-employed person shelter far more than a regular IRA’s $7,500 limit — both can reach the same $72,000 overall cap in 2026. But they get there in very different ways, and at most real-world income levels, one of them lets you put away meaningfully more.
The SEP-IRA: Employer Contributions Only
A SEP-IRA is funded entirely through employer contributions — even when you’re a one-person business acting as your own employer. The limit is 25% of compensation, which for a self-employed person works out to roughly 20% of net self-employment income after accounting for the self-employment tax deduction, capped at $72,000 for 2026. There’s no employee deferral piece at all, which is the entire difference between this and a Solo 401(k).
The Solo 401(k): Deferral Plus Profit Sharing
A Solo 401(k) lets you wear two hats. As the “employee,” you can defer up to $24,500 in 2026 (pretax or Roth), regardless of how much profit the business made, as long as you have at least that much in net self-employment income. As the “employer,” you can then add a profit-sharing contribution on top, using the same roughly-20%-of-net-self-employment-income formula the SEP-IRA uses — all the way up to the same $72,000 overall cap ($80,000 if you’re 50 or older, factoring in the catch-up contribution).
Real Numbers: Lower and Mid Income Self-Employed
The gap shows up clearly at lower income levels. Say your net self-employment income after the deduction for self-employment tax works out to $60,000. A SEP-IRA caps you at roughly 20% of that, around $12,000. A Solo 401(k) lets you defer $24,500 as the employee first — more than double the entire SEP contribution — and then still add a profit-sharing contribution on top of that. At lower and middle incomes, the Solo 401(k)’s employee deferral is what makes it the stronger choice almost every time, since the SEP-IRA has nothing equivalent to it.
When SEP-IRA Still Wins
The SEP-IRA isn’t obsolete. It wins on pure administrative simplicity — no separate 401(k) plan document, and none of the Form 5500-EZ filing a Solo 401(k) requires once plan assets pass $250,000. It’s also the more practical choice if you have common-law employees you’d need to cover (Solo 401(k)s are specifically for owner-only businesses), or if you’re already maxing out a W-2 job’s 401(k) deferral elsewhere and only need employer-side contribution room from your side business, since the $24,500 deferral limit is shared across all your 401(k) plans combined — see our guide to 2026 retirement contribution limits for how that shared limit works.
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