SEP IRA vs. Solo 401(k): Which Is Better?

When you’re self-employed, you’re in charge of choosing and funding your retirement plan. In place of an employer-provided retirement plan like a 401(k), you may consider making contributions to a SEP IRA or Solo 401(k) plan. But which one is the better option when it comes to saving money for your retirement?

Ultimately, it depends on which plan makes the most sense for your overall retirement strategy. Here are the ins and outs of both SEP IRAs and Solo 401(k)s, as well as their pros and cons..

A financial advisor can help you create a retirement plan for your goals.

What Is a SEP IRA?

A SEP IRA, or Simplified Employee Pension, is a type of individual retirement account that’s designed for small business owners and the self-employed.

Small business owners can set up these plans for themselves and their employees, if they have any. With this type of plan, only the employer makes contributions; employees don’t add any of their own money. However, employees are always 100% vested in their accounts at all times.

As a self-employed person, you can make contributions to a SEP IRA no matter the size of your business or your business structure. That means you can use one of these accounts for retirement savings whether you have a sole proprietorship, limited liability company or corporation.

For 2026, the SEP IRA contribution limit for employers is the lesser of 25% of the employee’s compensation or $72,000. There are no catch-up contributions associated with a SEP IRA. Contribution limits for self-employed individuals work a little differently: Contributions are limited to 25% of net earnings from self-employment, up to the annual limit.

In terms of how SEP IRAs are taxed, they follow the same rules as traditional IRAs. Contributions are tax-deductible, and for self-employed individuals, the IRS has a formula that determines what amount you can deduct, based on your self-employment earnings.

Qualified withdrawals are taxed at your ordinary income tax rate in retirement. At age 73, you must begin taking required minimum distributions (RMDs). The amount of these RMDs isbased on your account balance and life expectancy.

What Is a Solo 401(k)?

A Solo 401(k), also known as an individual 401(k), is a 401(k) retirement account that’s designed for sole proprietors and small business owners whose only employee is their spouse. With this type of 401(k), the account owner can make contributions both as the employer and as the employee.

For 2026, you can contribute 100% of compensation as an elective salary deferral, up to the annual limit of $24,500. An additional $8,000 catch-up contribution is allowed for self-employed workers age 50 to 59, or age 64 or older. If you’re between the ages of 60 and 63, you can increase catch-up contributions to $11,250.

The amount you can make for non-elective employer contributions is based on your net earnings from self-employment after deducting one-half of your self-employment tax and contributions for yourself. Altogether, total contributions, not counting catch-up contributions, are limited to $72,000 for 2026.

For tax purposes, a Solo 401(k) is treated the same as a traditional 401(k), unless it’s designated as a Roth account. Under traditional 401(k) rules, your qualified withdrawals are taxed at your ordinary income tax rate. A 10% early withdrawal penalty and ordinary income tax would apply to non-qualified withdrawals. RMDs kick in beginning at age 73.

Meanwhile, a Roth Solo 401(k) would follow Roth IRA tax rules. That means there would be no deduction for contributions, but qualified withdrawals would be tax-free. There are also no RMDs to worry about for Roth accounts.

SEP IRA Pros and Cons

A client and advisor shaking hands, with a pink piggy bank on the desk.

A SEP IRA offers a range of benefits, particularly for small business owners and self-employed individuals seeking a tax-advantaged retirement savings plan with high contribution limits. However, the limitations on employee contributions and the uniform contribution requirement may pose challenges for some businesses. Understanding the pros and cons of a SEP IRA can help you make an informed decision about whether it’s the right choice for your retirement planning.

Pros of a SEP IRA

High contribution limits: SEP IRAs allow for significantly higher contribution limits compared to traditional IRAs. In 2026, you can contribute up to 25% of your compensation or $72,000, whichever is less. This makes it an attractive option for those looking to maximize their retirement savings.
Tax advantages: Contributions to a SEP IRA are tax-deductible, reducing your taxable income for the year. This can result in substantial tax savings, especially for high-income earners, while allowing your investments to grow tax-deferred until withdrawal.
Flexibility in contributions: Employers are not required to contribute every year, providing flexibility based on business performance. This feature is particularly beneficial for small business owners who may experience fluctuating income levels.

Cons of a SEP IRA

Employer-only contributions: Only employers can contribute to SEP IRAs, which means employees cannot make their contributions. This can limit the ability of employees to increase their retirement savings independently.
Uniform contribution requirement: Employers must contribute the same percentage of salary for all eligible employees, which can be costly if you have a large workforce.
No catch-up contributions: SEP IRAs do not allow for catch-up contributions for those aged 50 and older. This can be a disadvantage for older individuals looking to boost their retirement savings as they approach retirement age.

Solo 401(k) Pros and Cons

A Solo 401(k) can be a powerful tool for self-employed individuals looking to maximize their retirement savings. However, it’s essential to weigh the benefits against the potential drawbacks, such as complexity and fees, to determine if it’s the right fit for your financial situation.

Pros of a Solo 401(k)

High contribution limits: Solo 401(k) plans allow for higher contribution limits compared to traditional IRAs. As both the employer and employee, you can contribute up to $72,000 in 2026 if you’re under 50, and even more if you’re older, maximizing your retirement savings potential.
Tax advantages: Contributions to a Solo 401(k) can be made on a pre-tax basis, reducing your taxable income for the year. Depending on your tax situation, this can offer significant tax savings. It also allows for the tax-deferred growth of your investments.
Roth option availability: Many Solo 401(k) plans offer a Roth option, allowing you to make after-tax contributions instead. This would mean your withdrawals in retirement can be tax-free, providing flexibility in managing future tax liabilities.

Cons of a Solo 401(k)

Complex setup and maintenance: Establishing a Solo 401(k) can be more complex than other retirement plans. It requires more paperwork and administrative responsibilities, including annual filings with the IRS once your plan exceeds $250,000 in assets.
No employee contributions: Solo 401(k) plans are limited to business owners with no employees, which means you cannot offer this benefit to any staff you might hire in the future. This limitation can be a drawback if you plan to expand your business and hire employees.
Potential for higher fees: Some Solo 401(k) plans may come with higher fees compared to other retirement savings options. It’s important to carefully evaluate the costs associated with maintaining the plan to ensure it aligns with your financial goals.

How SEP IRAs and Solo 401(k)s Affect Employees

From an employee’s perspective, a SEP IRA and a Solo 401(k) operate very differently. A Solo 401(k) is not available to employees other than a business owner’s spouse, so most workers will never participate in one. If a business adopts a Solo 401(k), regular employees are excluded entirely and cannot contribute or receive employer contributions through that plan.

A SEP IRA, by contrast, can include employees once they meet eligibility requirements set by the employer within IRS rules. Employees do not make their own contributions to a SEP IRA, but they receive employer-funded contributions deposited directly into their individual SEP accounts. These contributions belong to the employee immediately, with no vesting schedule.

Contribution structure matters for employees because SEP IRA funding is tied to employer decisions. When the employer contributes, all eligible employees receive the same percentage of compensation as the owner does. If the employer skips contributions in a given year, employees receive nothing for that year. This can make retirement savings unpredictable for workers in businesses with uneven cash flow.

Portability is another distinction between SEP IRAs and Solo 401(k) plans. Once funds are contributed to a SEP IRA, employees can roll the balance into a traditional IRA or another eligible retirement account after leaving the company. Solo 401(k)s do not create this option for employees, since their participation is not permitted in the first place.

Bottom Line

A man comparing the differences between a SEP IRA vs. Solo 401(k).

Both SEP IRAs and Solo 401(k)s can help you sock away money for your later years when you run your own business. Your age, self-employment earnings and business structure may determine which one is best for your retirement goals. Consider the costs and ongoing responsibilities to maintain your account, as well as how much you can put into the account as a self-employed business owner. With a little research, you’ll find the right retirement plan for your current and future financial situation.

Tips for Self-Employed Retirement Planning

A financial advisor could help you create a retirement plan for your needs and goals. Finding a financial advisor doesn’t have to be hard. SmartAsset’s free tool matches you with vetted financial advisors who serve your area, and you can have a free introductory call with your advisor matches to decide which one you feel is right for you. If you’re ready to find an advisor who can help you achieve your financial goals, get started now.
If you haven’t done so yet, use a retirement calculator to determine how much money you’ll need to save. Then, compare that to what you’ve saved already. Calculate how much money you’ll need to put away yearly and monthly from your self-employment income to reach your goal.
Consider how you can supplement your retirement savings, too. If you have a high-deductible health plan, for instance, you may be able to save money on a tax-advantaged basis in a Health Savings Account.