General information, not tax advice. Every 2026 figure below was verified at write time against the IRS's SEP contribution page, IRS Notice 2025-67, the Social Security Administration, and Fidelity's plan-limit pages. Self-employed contribution math has a few circular steps — a tax professional can confirm your exact dollar number.
A SEP IRA and a Solo 401(k) are both retirement accounts built for people who work for themselves — no employees, or only a spouse — and both let you shelter far more than a regular IRA. A Roth IRA is a smaller, simpler account anyone with earned income can open on the side. The three aren't really fighting for the same job: the SEP and Solo 401(k) compete for your biggest retirement dollars, and the Roth plays a supporting role next to whichever one you pick.
If you're self-employed and searching "which retirement account," the honest answer depends on one number: your net self-employment income. Get that number right and the choice mostly makes itself.
Which should a self-employed person actually open?
Under roughly $237,500 in net self-employment income, the Solo 401(k) lets you shelter more money than a SEP IRA — often two or three times more at a typical freelance income. That's because part of its contribution room isn't tied to a percentage of what you earn. Above about $360,000, the two plans converge completely and either works — pick the SEP for its zero paperwork, or the Solo 401(k) if you want a Roth option and don't mind one extra IRS form once your balance passes $250,000.
The number that actually decides this
Here's the arithmetic behind that chart. A SEP IRA's entire contribution comes from one place: the "employer" side, worth about 20% of your net self-employment earnings (that 20% is the self-employed version of the plan's official 25%-of-compensation rule — the math works out lower once you account for the deduction). A Solo 401(k) adds a second bucket on top of that same ~20%: an employee deferral of up to $24,500 in 2026, which isn't tied to a percentage at all. At modest income, that flat $24,500 bucket is where most of the advantage lives.
The two plans converge because the employer-side math is the same in both — 20% of net earnings — but the Solo 401(k)'s flat $24,500 deferral closes the gap to the shared $72,000 ceiling much sooner. Solve the equation (employer 20% + $24,500 = $72,000) and the crossover lands at $237,500 of net income. Below that, the Solo 401(k) wins. Above $360,000 — where 20% alone reaches $72,000 — both plans max out identically, and the deferral bucket stops mattering.
SEP IRA vs. Solo 401(k), side by side
| SEP IRA | Solo 401(k) | |
|---|---|---|
| 2026 total cap (under 50) | $72,000 | $72,000 |
| Who contributes | You, as "employer," only | You, as employee and employer |
| Employee deferral | None | Up to $24,500 (up to 100% of compensation) |
| Employer contribution | ~20% of net self-employment earnings | ~20% of net self-employment earnings, on top of the deferral |
| Catch-up, age 50–59 or 64+ | None — the plan has no deferral to catch up on | +$8,000 (total $80,000) |
| Catch-up, age 60–63 | None | +$11,250 "super" catch-up (total $83,250) |
| Roth option | No — pre-tax only | Yes, if your provider offers a Roth Solo 401(k) |
| Loan option | No | Yes, through many providers |
| Must be opened by | Your tax filing deadline, with extensions | December 31 of the year you want to contribute for |
| Extra paperwork | None | Form 5500-EZ once plan assets top $250,000 |
| Compensation cap used | $360,000 | $360,000 |
What this means if you also have a day job
A lot of OwlCent readers aren't full-time freelancers — they're side-hustling on top of a W-2 job with its own 401(k). One rule here trips people up constantly: the $24,500 employee deferral limit is per person, not per plan. If you already deferred $15,000 into your employer's 401(k) this year, you have $9,500 of deferral room left for your Solo 401(k) — not a fresh $24,500. The employer side of the Solo 401(k), though, is separate and untouched by your day job's plan — that ~20%-of-net-earnings bucket is yours in full, on top of whatever your employer put in elsewhere.
Common mistakes
- Opening a Solo 401(k) in March for last year. The account has to exist by December 31 of the tax year — a SEP does not have this problem.
- Forgetting the deferral limit is shared across every 401(k) you're in. A day job's 401(k) and a Solo 401(k) draw from the same $24,500 bucket.
- Assuming a working spouse disqualifies "Solo." It doesn't — a spouse employed in the business is allowed. Any other employee working 1,000+ hours a year is what ends Solo 401(k) eligibility.
- Calculating the employer contribution off gross revenue. It's based on net self-employment earnings — profit, after business expenses and after the deduction for one-half of self-employment tax.
- Ignoring Form 5500-EZ. Once a Solo 401(k)'s assets cross $250,000, the IRS wants an annual filing. A SEP never requires this at any balance.
Edge cases worth knowing
Irregular or freelance income? A SEP's simplicity can suit irregular earners who'd rather decide the whole contribution once, at tax time, than commit to a deferral election in advance. Our irregular-income budgeting guide covers the cash-flow side of that decision.
Starting completely from zero? In your first year self-employed, a SEP's lack of a hard deadline takes the pressure off — open a Solo 401(k) once your income and paperwork tolerance catch up. Until either account makes sense, a Roth IRA alone (no deadline pressure, $7,500 cap for 2026) is a perfectly good place to start; see our Roth vs. traditional IRA guide.
Very tight budget, can't max anything? Contribute what you can — there's no minimum in either plan, and a partial contribution still shelters that income from tax this year. Our investing your first $1,000 guide has the smaller-scale version of this decision.
Multiple businesses, or a business with real employees? A SEP IRA generally must cover every eligible employee at the same percentage — it stops being "solo" fast. A Solo 401(k) requires no full-time non-spouse employees at all. That distinction alone often settles the choice once a freelancer starts subcontracting work out.
Who should skip this
Skip both accounts if you have no self-employment income — a workplace 401(k) plus an IRA is the right toolkit for pure W-2 income, and our 401(k) vs. IRA guide covers that order. Skip the Solo 401(k) specifically if your side income is small and unpredictable and you're not close to the $24,500 deferral bucket — the paperwork isn't worth it yet. And skip either one, for now, if you're carrying high-interest debt or have no cash buffer; our pay off debt or invest first guide draws that line, and a locked-up retirement dollar is the wrong dollar to be saving first.
Quick answers
Can I contribute to both a SEP IRA and a Solo 401(k) for the same business in the same year? Generally not in a way that helps you. Both plans draw from the same $72,000 overall IRS limit for a single business, so running both adds paperwork without adding room. Pick one per business.
Can I have a Solo 401(k) if my spouse works with me? Yes. A spouse who works in the business is allowed under a Solo 401(k) — it's other, unrelated employees working 1,000+ hours a year that end eligibility.
Is a SEP IRA or Solo 401(k) better for a brand-new freelancer with modest income? Usually the Solo 401(k), because the flat $24,500 deferral bucket shelters far more at low-to-moderate income than the SEP's percentage-only formula. If your income is very small, a Roth IRA alone may be simpler and sufficient for now.
Can I open a Roth version of a SEP IRA? No. A SEP IRA is pre-tax only. Some (not all) Solo 401(k) providers offer a Roth option — check before you open the account if that matters to you.
Can I withdraw my Solo 401(k) contributions early the way I can with a Roth IRA? No, and this is an easy mix-up. A Roth IRA's contribution layer can come out anytime, tax- and penalty-free, under IRS ordering rules — see our brokerage vs. Roth IRA guide. A Roth Solo 401(k) follows 401(k) distribution rules instead, which are far more restrictive.