Handbook / Retirement accounts

SEP IRA vs solo 401(k) for the 2026 tax year: which suits a one-person business

Tax-year note: Tax information on this page applies to the 2026 tax year (returns filed in 2027), from IRS pages checked in November 2026. Figures and dates are labelled with their tax year where they appear. Check current IRS pages before you rely on them.

For a self-employed person with no employees, the two most common retirement plans are the SEP IRA and the one-participant or "solo" 401(k). Both offer far more room than a regular IRA. They differ in how contributions are calculated, how much paperwork they need, and how they handle future employees. This guide compares them for the 2026 tax year.

How a SEP works

A SEP lets the business make employer contributions to your own IRA. For 2026, the IRS says contributions cannot exceed the lesser of 25% of compensation or $72,000.

For a sole proprietor, "compensation" is net earnings from self-employment after deducting half of self-employment tax and the SEP contribution itself. That circular calculation means the effective rate for most owners works out to 20% of net earnings after the self-employment tax deduction, not 25%. The IRS provides a rate table and worksheet in its retirement publications.

The SEP has one contribution type, the employer contribution. There is no separate employee deferral.

How a solo 401(k) works

A one-participant 401(k) lets you contribute in two roles:

1. As the employee: an elective deferral of up to $24,500 for 2026, up to 100% of compensation.
2. As the employer: a profit-sharing contribution calculated like the SEP, at up to 25% of compensation, which for a self-employed owner works out to about 20% of net earnings after the self-employment tax deduction.

Combined, contributions are capped by the same $72,000 annual limit for 2026 that applies to the SEP, not counting catch-up contributions. The employee deferral limit is shared across all 401(k) plans you participate in, including one at a job.

Catch-up contributions

The solo 401(k) allows catch-ups; the SEP does not have a separate catch-up. For 2026, the IRS says the catch-up limit for most 401(k) participants aged 50 and over is $8,000, and a higher limit of $11,250 applies to those aged 60, 61, 62 and 63.

Which allows more?

At low and moderate incomes, the solo 401(k) usually allows more, because the employee deferral is not limited by the 20% calculation. For example, someone with modest net earnings might be able to defer most of them through a 401(k), while a SEP would allow about a fifth.

At high incomes, both can reach the $72,000 cap, and the solo 401(k)'s main advantage becomes catch-up contributions and features.

Paperwork and features

SEP

• easy to set up with most brokerages, often with an IRS model form
• no annual IRS filing for the plan
• contributions are flexible year to year

Solo 401(k)

• a plan document from a provider
• Form 5500-EZ once plan assets reach $250,000 or more at year end
• Roth deferrals and sometimes loans, depending on the plan
• tracking of employee and employer amounts separately

Employees change everything

A SEP generally requires contributions for eligible employees at the same percentage of pay as for yourself. A one-participant 401(k) is meant for a business owner, and spouse, with no common-law employees. If you expect to hire soon, consider how each plan would need to change. A SIMPLE IRA is another option for small employers.

Deadlines

The IRS says a SEP can be set up for a year as late as the due date of your business's income tax return, including extensions, and contributions are generally made by that date too. Solo 401(k) rules on when the plan must exist and when deferral elections must be made are stricter, so check with your provider well before year end if you want 2026 deferrals.

A simple way to choose

• Choose a SEP if you want simplicity, have higher income where the 20% rate already reaches your goal, or may hire employees and are comfortable covering them.
• Choose a solo 401(k) if you want to save as much as possible at moderate income, want catch-ups or Roth deferrals, and have no employees.

For detail on each plan, see the guides to the SEP IRA and the solo 401(k).

For the 2026 tax year, both plans cap at $72,000 before catch-ups, but the solo 401(k)'s $24,500 deferral usually allows more at moderate income. The SEP wins on simplicity.