Retirement Plans for the Self-Employed: SEP-IRA vs Solo 401(k)
One of the underrated perks of self-employment is how much you can shelter for retirement — the limits are far higher than a regular IRA. The two workhorse plans are the SEP-IRA and the Solo 401(k). They both cut your tax bill and build retirement savings, but they're structured differently, and that difference decides which one lets you contribute more at your income. Here's how to choose — with a clear, honest note about the 2026 dollar figures.
Why the self-employed have great options
As your own employer, you can wear both hats — employer and employee — when funding a retirement plan, which is why self-employed limits dwarf the standard IRA cap. Contributions to a traditional (pre-tax) plan are deducted from income, so you're effectively saving with pre-tax dollars and lowering this year's tax at the same time.
The SEP-IRA
A SEP-IRA (Simplified Employee Pension) is the easy option. There's one contribution — an employer contribution equal to a percentage of your compensation, up to the annual dollar cap. For a self-employed person the contribution is a percentage of net self-employment earnings (after the deduction for half your SE tax), so the effective ceiling as a share of profit is a bit lower than the headline percentage. Pros: dead simple to open, no annual filing at low balances, and you can decide the amount each year. Cons: no employee-deferral piece and no catch-up, so at moderate income you can't contribute as much as a Solo 401(k).
The Solo 401(k)
A Solo 401(k) (one-participant 401(k)) has two contribution sources:
- An employee elective deferral — money you defer as the "employee," which you can contribute regardless of how large your profit is (up to the deferral limit).
- An employer profit-sharing contribution — a percentage of compensation, like the SEP.
Both sit under an overall annual-additions cap. Because the deferral doesn't depend on a percentage of profit, a Solo 401(k) lets moderate earners put away much more than a SEP at the same income. It also allows an age-50 catch-up contribution and often a Roth option for the deferral. The trade-off is a bit more setup and, once the account grows past a filing threshold, an annual information return.
Which lets you save more
| Feature | SEP-IRA | Solo 401(k) |
|---|---|---|
| Contribution parts | Employer only (% of comp) | Employee deferral + employer profit-share |
| Best at | High income; want simplicity | Low-to-moderate income; want to max out |
| Age-50 catch-up | No | Yes |
| Roth option | Generally no | Often yes |
| Setup / admin | Very simple | Slightly more; filing once large |
| Good for employees? | Yes (must cover eligible staff) | Owner-only (and spouse) |
The pattern: at low-to-moderate income, the Solo 401(k)'s employee deferral lets you contribute a far larger share of your earnings, so it usually wins. At high income, both plans can approach the same overall cap, and the SEP's simplicity can tip the balance if you don't need the catch-up or Roth features.
How contributions cut your tax
A traditional (pre-tax) contribution to either plan is deducted from your income, lowering your federal and (usually) state income tax for the year. Two nuances worth knowing:
- It does not reduce the 15.3% self-employment tax — that's figured on net earnings before the retirement deduction.
- It does lower your qualified business income, so it slightly trims your QBI deduction — a small offset worth modeling, not a reason to skip contributing.
Put a few thousand dollars into a pre-tax plan and you both build retirement savings and shave this year's income-tax bill — one of the cleanest tax moves available to the self-employed.
A note on the 2026 dollar limits
The exact 2026 contribution caps — the employee deferral limit, the overall annual-additions cap, the catch-up amount, and the compensation cap — are set by the IRS each year in its annual cost-of-living notice, not in Reckix's rate dataset. Rather than print a figure we can't verify here, we've kept the dollar amounts out of this guide on purpose. Look up the current-year numbers on the IRS "Retirement Topics — Contribution Limits" page or in Publication 560 before you fund a plan, and confirm them with your custodian.
See the income you're planning around. The calculator shows your self-employment tax and rough income tax — the bill a pre-tax retirement contribution helps reduce.
Open the Self-Employment Tax Calculator →- IRS, Publication 560, Retirement Plans for Small Business (SEP, SIMPLE, and Qualified Plans)
- IRS, One-Participant 401(k) Plans
- IRS, Retirement Topics — Contribution Limits (annual COLA notice sets the current-year caps)
Frequently asked questions
What is the difference between a SEP-IRA and a Solo 401(k)?
A SEP-IRA takes a single employer contribution — a percentage of your compensation — and is very simple to open and run. A Solo 401(k) has two parts: an employee elective deferral (which you can contribute regardless of profit level) plus an employer profit-sharing contribution. Because of the employee-deferral piece, a Solo 401(k) usually lets a moderate earner contribute more than a SEP-IRA at the same income, and it allows an age-50 catch-up and often a Roth option.
Which plan lets a self-employed person save more?
At higher incomes the two can reach a similar overall cap, but at low-to-moderate income the Solo 401(k) generally wins, because its employee elective deferral doesn’t depend on a percentage of profit — you can put in a full deferral even when profit is modest, then add the employer share on top. The SEP-IRA’s contribution is purely a percentage of compensation, so it lags at lower incomes.
How do retirement contributions lower my taxes?
Traditional (pre-tax) contributions to a SEP-IRA or Solo 401(k) are deducted from your income, lowering your federal — and usually state — income tax for the year. They don’t reduce the 15.3% self-employment tax, which is figured before the retirement deduction, but they do cut income tax and, because they lower qualified business income, they slightly reduce your QBI deduction too.
Can I have a Solo 401(k) if I have employees?
A Solo 401(k) is designed for an owner-only business (you, and optionally a spouse who works in the business). Once you have other full-time common-law employees who qualify, you generally can no longer use a one-participant 401(k) and would need a different plan such as a SEP-IRA or a traditional 401(k). Confirm eligibility with the plan rules before you hire.
This article is educational information, not tax, legal, or financial advice, and not an offer of any product. The exact 2026 contribution limits for these plans are set by the IRS in its annual cost-of-living notice and are not part of Reckix’s dataset, so this guide describes the plan structures qualitatively; confirm the current dollar caps with the IRS before contributing. Figures reflect published 2026 guidance and rates as of July 2026 and can change; confirm current numbers and how they apply to your situation with a licensed tax professional or advisor. Last reviewed July 2026. No liability is accepted for decisions made from this content.