SEP IRA vs Solo 401(k) in 2026: Which Plan Wins?

For most self-employed owners, the solo 401(k) allows roughly $24,500 more in annual contributions. Here's the math — and the three situations where the SEP IRA still makes sense.

Key differences at a glance

Contribution comparison by income (sole proprietor / LLC, 2026)

The employer profit-sharing formula is the same for both plans: roughly 20% of net self-employment income (25% of compensation as defined after the SE tax deduction). The solo 401(k) adds an employee elective deferral on top.

Employer contribution = net SE income × 0.9235 × 0.20, capped at $72,000 and $360,000 compensation limit. Annual additions capped at $72,000 (§415(c)); catch-up contributions are in addition to this limit. S-corp: employer = W-2 salary × 0.25. Values per IRS Notice 2025-67.

Interactive calculator: your SEP IRA vs solo 401(k) max

Employer contribution = net SE income × 0.9235 × 0.20 (sole prop) or W-2 × 0.25 (S-corp). Total annual additions capped at $72,000 (§415(c)); catch-up contributions added on top. Tax savings = additional contributions × your marginal rate. Estimate only — consult your CPA.

When solo 401(k) wins (most cases)

The employee elective deferral is the decisive factor. Every dollar of that $24,500 is withheld from your taxable income — meaning at a 32% marginal rate, maxing the deferral saves you $7,840 in federal income tax that the SEP IRA can't match. Here's the full advantage:

• $24,500 more per year in contributions (for incomes under ~$390K SE or ~$285K S-corp W-2)
• Roth option — solo 401(k) allows Roth deferrals, SEP IRA has no Roth version
• Catch-up contributions — $8,000 at age 50+, $11,250 at age 60–63, unavailable in SEP IRA
• Loan provision — borrow up to $50,000 or 50% of your vested balance (custom plans only; not at Fidelity/Schwab)
• Backdoor Roth compatibility — roll your SEP IRA into the solo 401(k) to clear the pro-rata rule and execute a tax-free backdoor Roth conversion
• No mandatory employee coverage — SEP IRA requires you to fund all eligible employees at the same rate; solo 401(k) is for owner and spouse only

When SEP IRA still makes sense

The solo 401(k) wins on raw numbers, but there are three scenarios where the SEP IRA is the right choice:

1. You missed the year-end election deadline

To make employee elective deferrals into a solo 401(k) for 2026, you must elect them by December 31, 2026. If you're setting up a plan in January 2027 for the 2026 tax year, your only option for the full contribution (employer profit-sharing) is a SEP IRA or late-adopted solo 401(k) — and only employer profit-sharing is available in a retroactively adopted plan under SECURE 2.0 §317.⁴ SEP IRA lets you contribute the full employer amount with no pre-year election required.

2. You earn over $390K in net SE income (or $285K+ in W-2 salary) and are under age 50

At this income level, the employer profit-sharing contribution alone fills the $72,000 §415(c) limit. The solo 401(k)'s extra $24,500 employee deferral produces no additional deduction — both plans cap at $72,000. If you're under 50 (no catch-up), the SEP IRA's simplicity is a genuine trade-off worth considering. You still lose the Roth option and loan access, but the dollar difference is zero.

3. You prioritize simplicity over optimization

A SEP IRA has no plan document, no Form 5500 (required for solo 401(k) plans with over $250,000 in assets), no year-end elections, and no required contribution schedule. Open a Fidelity or Schwab SEP IRA online in five minutes, fund it any time up to October 15 of the following year, and you're done. For a business owner who genuinely won't spend the time to manage a solo 401(k) properly, a funded SEP IRA beats an optimized solo 401(k) that never gets set up.

Rolling your SEP IRA into a solo 401(k)

If you already have a SEP IRA and want to switch, you can roll the entire balance into your solo 401(k) as a direct trustee-to-trustee transfer. The two main reasons to do this:

• Backdoor Roth IRA access. Pre-tax money sitting in a SEP IRA counts against the pro-rata rule when you do a backdoor Roth conversion. Rolling the SEP into a solo 401(k) clears the IRA balance to zero, making the backdoor Roth fully tax-free. The roll must be completed by December 31 of the year you plan to do the Roth conversion.³
• Higher contribution limits going forward. Once consolidated, all future contributions go through the solo 401(k) with the $24,500 employee deferral available.

The rollover is straightforward: your solo 401(k) plan document must explicitly accept incoming rollovers (most do), and you request an outbound rollover from your SEP IRA custodian. No taxes owed — it's a pre-tax-to-pre-tax transfer.

Can you have both a SEP IRA and a solo 401(k) at the same time?

Technically yes — you can hold both accounts simultaneously. But contributing to both based on the same self-employment income provides no additional deduction benefit. The total employer contributions across all plans based on the same SE income are still capped at 25% of compensation (20% net for sole props) and $72,000 under §415(c). The solo 401(k)'s employee elective deferral is additional, but funding employer contributions to a SEP IRA and a solo 401(k) from the same income just splits the same employer bucket between two accounts.

The practical advice: if you have a solo 401(k), consolidate and use only that. If you have a SEP IRA and want to switch, roll it into the solo 401(k) and contribute going forward only to the solo 401(k).