A SEP IRA and a Solo 401(k) both help a solo business owner save for retirement. The main tradeoff is simple: a SEP IRA takes less work, while a Solo 401(k) often lets an owner save more at the same income.
Who qualifies for each account?
A SEP IRA can be opened by a self-employed person or a business of almost any type. For a solo owner, that may mean a sole proprietorship, partnership, LLC, or corporation.
A Solo 401(k) is for a business owner with no employees who must be covered by the plan. The owner’s spouse can take part if the spouse earns income from the business. If the business later hires an eligible employee, the owner-only rules no longer apply.
Both plans require income earned from the business. Investment income by itself does not qualify.
How do SEP IRA and Solo 401(k) contributions work?
A SEP IRA accepts employer contributions only. The business chooses how much to contribute each year, including nothing. For 2026, the limit is generally the smaller of 25% of compensation or $72,000. A self-employed owner’s calculation is lower than a simple 25% of net profit because of special tax rules.
A Solo 401(k) lets the owner contribute in two roles. An employee deferral is money the owner puts in from pay or earned income. The owner may also make an employer contribution. For 2026, the employee deferral limit is $24,500, and the combined limit is generally $72,000 before catch-up contributions. Owners age 50 or older may be able to add a catch-up contribution.
The employee deferral limit is shared across 401(k) plans. If you also contribute to a 401(k) at another job, you do not get a new $24,500 limit for the solo plan.
| Question | SEP IRA | Solo 401(k) |
|---|---|---|
| Who contributes? | Employer only | Owner as employee and employer |
| 2026 regular maximum | Generally up to $72,000 | Generally up to $72,000 |
| Catch-up contribution | No | Yes, if the plan allows it |
| Annual contribution required? | No | No |
| Ongoing paperwork | Lower | Higher |
What is a simple contribution example?
Suppose a 40-year-old owner runs an S corporation and receives $80,000 of W-2 wages. Assume the owner has no other retirement plan.
With a SEP IRA, the company could contribute up to 25% of those wages, or $20,000.
With a Solo 401(k), the owner could defer $24,500 as an employee. The company could also contribute $20,000 as the employer. That would put the total at $44,500.
The Solo 401(k) allows more in this example because it combines the employee and employer amounts. Actual limits depend on business type, compensation, other plans, age, and the plan document. The account should also fit the owner’s broader financial plan, not just maximize one year’s contribution.
How much administration does each plan require?
A SEP IRA is usually easier to open and maintain. The business adopts a short plan document, such as the IRS model form, and contributions go into an IRA for the owner. The plan generally does not file an annual Form 5500.
A Solo 401(k) needs a formal plan document and better recordkeeping. The owner must track employee and employer contributions separately and follow the plan’s deadlines. Form 5500-EZ is generally required when plan assets reach $250,000 at year-end. A final filing is also generally required when the plan ends.
Which plan generally suits each type of owner?
A SEP IRA may fit when:
- You value a simple setup and little yearly paperwork.
- You want flexible employer contributions from year to year.
- Your income is high enough that employer-only contributions meet your goal.
A Solo 401(k) may fit when:
- You want to save more at a moderate level of business income.
- You want catch-up contributions after age 50.
- You are willing to handle more plan rules and recordkeeping.
The bottom line
A SEP IRA is usually the easier choice. A Solo 401(k) often gives a solo owner more room to save, especially before income is high enough to reach the same amount through employer contributions alone.
At Santafino, our CPAs and fee-only fiduciary wealth managers can compare the tax rules with your retirement goals. That helps you choose a plan based on your full financial picture, not one limit in isolation.
FAQ
Can I have a Solo 401(k) if I hire an employee?
A Solo 401(k) is for an owner-only business, though the owner's spouse can also take part. If you hire an employee who becomes eligible for the plan, the plan rules change and you may need a different setup.
Can I contribute to a SEP IRA and a Solo 401(k) in the same year?
It may be possible, but the limits can overlap when the same business sponsors both plans. Do not assume each plan gives you a separate full contribution limit.
Does a Solo 401(k) require an annual tax filing?
It generally requires Form 5500-EZ once total plan assets reach $250,000 at year-end. A final return is also generally required when the plan closes, even if its assets are below that amount.
