If you run your own business, you can usually save far more for retirement than an employee can. The catch is that you have to pick the account yourself, and two of the most common choices, the SEP IRA and the solo 401(k), behave very differently once you run the numbers.
This guide compares them using 2026 limits, with worked examples for a sole proprietor, so you can see how much each plan may let you shelter and where the practical differences show up. It is educational, not tax advice, and your own situation may change the answer.
The short version
For most self-employed people with no employees, a solo 401(k) can shelter more money at the same income, because it lets you contribute as both the "employee" and the "employer." A SEP IRA is simpler and has a longer window to open and fund it, which can matter if you are deciding at tax time.
2026 limits at a glance
| Feature | SEP IRA | Solo 401(k) |
|---|---|---|
| Employee deferral | None | $24,500 |
| Employer contribution | Up to 25% of compensation | Up to 25% of compensation |
| Overall cap (under 50) | $72,000 | $72,000 |
| Catch-up, age 50 and older | Not available | +$8,000 |
| Catch-up, ages 60 to 63 | Not available | +$11,250 (instead of the $8,000; plan must allow it) |
| Roth option | Rarely offered by custodians | Commonly offered for employee deferrals |
| Loans | No | May be allowed, depending on the plan |
These figures reflect the 2026 limits as reported by several retirement-plan sources. Confirm the current numbers at IRS.gov or with your plan provider before you contribute, because limits are adjusted periodically.
How the math works for a sole proprietor
If you file as a sole proprietor or single-member LLC, the "25% of compensation" rule does not mean 25% of your net profit. Your compensation for this purpose is your net self-employment earnings after subtracting half of your self-employment tax. Because that subtraction also feeds back into the calculation, the effective employer rate works out to roughly 20% of net profit.
Here is the process in plain steps:
- Start with net profit from Schedule C.
- Multiply by 92.35% and then by 15.3% to estimate self-employment tax (this simple version holds below the Social Security wage base).
- Subtract half of that tax from net profit.
- Multiply the result by 20% to estimate the maximum employer-type contribution.
A SEP IRA uses only that last number. A solo 401(k) adds the $24,500 employee deferral on top, up to the overall cap.
Worked examples (hypothetical)
| Net profit | Approx. SEP IRA maximum | Approx. solo 401(k) maximum |
|---|---|---|
| $60,000 | $11,150 | $35,650 |
| $120,000 | $22,300 | $46,800 |
| $150,000 | $27,900 | $52,400 |
These are rounded, hypothetical estimates for a sole proprietor under age 50 with no other retirement plan contributions. They ignore state taxes, other income, and any contributions made through an employer plan elsewhere.
The pattern is the point. At $60,000 of net profit, the solo 401(k) may allow roughly three times as much as a SEP IRA, because the $24,500 employee deferral does most of the work. As income rises, the gap narrows in percentage terms, and the two plans converge only near the overall cap. Under these simplified assumptions, a solo 401(k) could reach $72,000 at a net profit somewhere around $250,000, while a SEP IRA would need a net profit well above $350,000. Exact crossover points depend on the Social Security wage base and your other income.
Keep in mind that being allowed to contribute a certain amount is not the same as being able to. A $46,800 limit does nothing for you if your cash flow supports $15,000. The plan with the higher ceiling is only more useful if you would actually use the room.
What changes if you are an S corporation owner
If you pay yourself through an S corporation, the employer contribution is based on your W-2 wages, not on total business profit. Under the 25% rule, a $100,000 salary may support up to $25,000 of employer contributions in either plan. The solo 401(k) again adds your employee deferral on top, which is why the difference tends to be larger for owners who keep their salary modest.
This is also where the interaction with payroll taxes and "reasonable compensation" rules gets complicated. A tax professional who works with S corporations is worth the cost here. For a broader picture of how business equity fits into your finances, see how to calculate your net worth as a business owner.
Catch-up contributions: where the solo 401(k) pulls ahead
If you are 50 or older, the solo 401(k) allows an extra $8,000 of employee deferral in 2026. If you are 60 to 63, the limit may rise to $11,250 instead, if your plan document allows it. The SEP IRA has no catch-up provision.
For a 61-year-old with enough profit, that could mean employee deferrals of up to $35,750 ($24,500 plus $11,250) before any employer contribution, subject to the overall limit and the plan's terms. For someone who started saving late, this can be a meaningful lever. If you are working out what your target even looks like, how much money do I need to retire walks through the underlying math.
Roth options
The solo 401(k) is the more flexible choice if you want tax-free growth. Many providers let you make your employee deferrals as Roth contributions, and recent law changes allow Roth treatment of employer contributions as well, though not every provider has set that up. SEP IRAs have historically been pre-tax only. A Roth SEP is permitted in principle, but many custodians do not yet offer one.
Whether pre-tax or Roth is better depends on your current tax bracket compared with your expected bracket in retirement, which is uncertain. Many people split contributions between the two to keep options open.
Setup deadlines and paperwork
The two plans differ sharply on timing and admin.
- SEP IRA: You can generally open and fund it as late as your tax filing deadline, including extensions. This makes it handy as a late-year or even after-year-end decision.
- Solo 401(k): The plan generally needs to be established by December 31 of the tax year for you to make employee deferrals for that year. The deferrals themselves can usually be funded up to your filing deadline. Opening the plan in January may mean missing that year's employee deferral.
- Reporting: A solo 401(k) generally requires an annual information return (Form 5500-EZ) once plan assets exceed $250,000. A SEP IRA has no such filing.
If you are reading this in October, there is still time to open a solo 401(k) for 2026. After December 31, the SEP IRA may be your only option for that tax year's contributions.
Which one fits which situation?
A SEP IRA may fit if you want minimal paperwork, you are making a decision close to or after year-end, your income is high enough that the employer-side limit already approaches your savings goal, or you may hire employees (a SEP generally requires covering eligible employees at the same contribution percentage you give yourself).
A solo 401(k) may fit if you are the only person in the business (or the business has only a spouse working in it), your profits are modest to moderate and you want to shelter as much as possible, you are 50 or older and want catch-up room, or you want a Roth option.
One important warning: both plans share the same overall annual cap, and the employee deferral limit is shared across every 401(k) you participate in, including one at a day job. If you have a side business and a W-2 job with a 401(k), your deferrals at both count against the same $24,500.
Why it matters over time
Contribution limits are only the start. What matters is what the money does for your long-term plan. A hypothetical difference of roughly $20,000 per year in tax-advantaged savings, invested over 15 years at a 6% average annual return, could grow to about $465,000 before taxes and fees. Returns are never guaranteed, and the actual outcome depends on markets, taxes, and how consistently you contribute. But it illustrates why choosing a plan with more room can compound into a very different retirement picture.
If you want to see how contributions change your timeline, the retirement planning tools and the business owner solutions page show how to model this alongside your business income.
Run your own numbers
Business income is lumpy, so a single-year calculation can mislead. Try modeling a few scenarios: a strong year, a weak year, and a sale or wind-down. See how each contribution level may change your projected net worth and retirement age.
Create a free Mogul Bay account to project your net worth, test different contribution levels, and see how business income fits into your retirement plan.
Disclaimer
This article is for educational purposes only and is not financial, tax, or legal advice. Contribution limits and rules change and depend on your individual circumstances. Examples are hypothetical and simplified, and past or assumed returns do not guarantee future results. Consult a qualified tax professional or financial advisor before choosing a retirement plan.