If you work for yourself, nobody hands you a retirement plan on your first day. There is no HR portal, no default enrollment, no match. You have to go pick an account, and the two that come up most often are the SEP IRA and the solo 401(k).
They sound like variations on the same idea. They are not. They cap out at the same dollar figure, but they get there by completely different math, and that difference decides which one is right for you.
Same ceiling, different staircase
Both accounts share a 2026 ceiling of $72,000. That comes from Section 415(c) of the tax code, which limits total annual contributions to a defined contribution plan, and the IRS raised it from $70,000 to $72,000 for 2026 in Notice 2025-67.
The ceiling is where the similarity stops.
A SEP IRA only accepts employer money. Even when you are your own employer, every dollar goes in on the employer side, and the employer side is limited to 25 percent of compensation.
A solo 401(k) accepts money from you twice. Once as the employee, once as the employer. For 2026 the employee deferral limit is $24,500, and the employer piece follows the same 25 percent rule as the SEP. Stack them and you reach the $72,000 ceiling from much further down the income ladder.
How the SEP IRA calculates your limit
If your business is an S corporation or a C corporation and you pay yourself a W-2 salary, the SEP math is clean. Take 25 percent of that salary. On a $120,000 salary you can put away $30,000.
If you are a sole proprietor filing a Schedule C, it gets stranger. Your contribution is based on net earnings from self employment, which means net profit reduced by half your self employment tax and by the contribution itself. That circularity works out to roughly 20 percent of net profit rather than 25 percent.
Run it on $100,000 of net profit. Subtract half of self employment tax and you land near $92,935 of net earnings. Your maximum SEP contribution comes out around $18,600. Not $25,000, which is what most people expect the first time they try this.
To actually hit the $72,000 ceiling with a SEP, a corporate owner needs about $288,000 in W-2 compensation. A sole proprietor needs roughly $360,000 in net profit. Which is also, not coincidentally, where the compensation that counts for retirement plan purposes tops out in 2026: $360,000.
How the solo 401(k) stacks two contributions
Same $100,000 sole proprietor. The solo 401(k) starts with your employee deferral of up to $24,500, which is not tied to a percentage of anything as long as you earned at least that much. Then you add the employer contribution, which uses the same calculation as the SEP, about $18,600.
Total: roughly $43,100. More than double the SEP result on identical income.
That gap is the whole argument. At high income the two accounts converge, because both stop at $72,000. Below roughly $200,000, the solo 401(k) lets you save substantially more, and the lower your income the wider the gap gets. Someone netting $40,000 can put almost all of it away in a solo 401(k) and only about $7,400 in a SEP.
Age changes the picture too. Catch-up contributions sit outside the $72,000 limit, and only the 401(k) offers them. At 50 or older you can add $8,000 in 2026. If you turn 60, 61, 62, or 63 during the year, SECURE 2.0 raises that to $11,250. A SEP IRA has no catch-up provision at all, because catch-ups are an employee feature and a SEP has no employee side.
One 2026 wrinkle worth knowing: participants in plans with a Roth feature must make catch-up contributions on a Roth basis if their prior year wages with the plan sponsor exceeded $150,000. That rule keys off W-2 wages, so a Schedule C sole proprietor with no wages generally is not caught by it, but an S corporation owner paying themselves above that threshold should ask their plan provider how it applies.
Where the SEP still wins
Simplicity, and the fact that it can wait.
A SEP IRA takes about ten minutes to open at any major brokerage. There is no annual government filing, ever. A solo 401(k) with more than $250,000 in assets has to file Form 5500-EZ each year, which is not difficult but is one more thing on the calendar.
The deadline difference matters even more. A SEP can be established and funded for the prior tax year right up until your filing due date, extensions included. That means you can be sitting with your accountant in September, see the tax bill, open a SEP, and reduce that year’s taxable income retroactively.
A solo 401(k) generally has to exist by December 31 of the year you want to defer into, at least for corporate owners. SECURE 2.0 loosened this for sole proprietors, who can now open a plan and make first-year employee deferrals up to their tax filing deadline, though not into an extension period. The employer portion can still go in later if you extended. The Journal of Accountancy has walked through how these deadlines interact for sole proprietors weighing the two.
The other place the SEP wins is when you have employees. A SEP requires you to contribute the same percentage of pay for every eligible employee that you contribute for yourself. Generous, and expensive. A solo 401(k) is not an option at all once you hire anyone other than your spouse. Hire your first employee and your solo 401(k) has to convert to a regular 401(k), with testing requirements and administration costs attached.
Two details people find out too late
Solo 401(k) plans can permit loans. Up to 50 percent of your vested balance or $50,000, whichever is less, paid back over five years. A SEP IRA cannot lend you anything, and taking money out before 59 and a half means income tax plus a 10 percent penalty. Whether borrowing from retirement savings is wise is a separate conversation, but the option existing is a real difference.
The second detail affects anyone doing backdoor Roth contributions. The pro-rata rule looks at the combined balance of all your traditional IRAs, including SEP IRAs, when calculating the taxable portion of a conversion. A six-figure SEP balance can make backdoor Roth contributions largely pointless. Balances inside a solo 401(k) are invisible to that calculation. High earners who convert every year often move away from SEPs for this reason alone, and it catches people by surprise because nothing about the account application mentions it.
Choosing between them
If you have employees beyond a spouse, the solo 401(k) is off the table.
If your income is high enough that 25 percent of it clears $72,000 anyway, either account gets you to the same place and the SEP is less paperwork.
If you are somewhere in the middle, which describes most freelancers, consultants, and side business owners, the solo 401(k) usually lets you shelter more. The tradeoff is a real setup deadline and an eventual filing requirement.
If it is already late in the year and you have not opened anything, know that the SEP door stays open longer.
Either account beats a savings account for money you will not touch for decades, though keeping several months of expenses in cash first still makes sense when your income arrives unevenly. Contribution limits reset every January. A savings account balance does not.