Solo 401(k) vs. SEP IRA: $24,500 More Room at $100K Profit

For most freelancers, a Solo 401(k) lets you contribute more than a SEP IRA at the same income, often much more. It adds an employee deferral of up to $24,500 in 2026 (plus catch-up from age 50) on top of the same 20% employer-style contribution a SEP allows. At $100,000 of net profit, that’s $43,087 in a Solo 401(k) against $18,587 in a SEP IRA for someone under 50. A SEP IRA is simpler to run, has no deferral election to track and doesn’t need an EIN. It only catches up with the Solo 401(k) near the top: both are capped at $72,000 for 2026, before catch-up.

Side by side

How much each lets you contribute

The numbers below come from the math in the Self-Employed Retirement Contribution Calculator. It uses the IRS reduced-rate method for self-employed contributions, the shared $24,500 deferral limit and the $72,000 overall cap.

• From $60,000 to $250,000 of profit in the table, the Solo 401(k) allows $24,500 more than the SEP for someone under 50, and $32,500 more from 50 to 59: the deferral, plus catch-up.
• At low incomes, the gap is smaller in dollars but large in proportion. At $30,000, a SEP allows $5,576, while a Solo 401(k) can shelter all $27,881 of your compensation, $22,305 more, if you can afford to.
• At the top, compensation above $360,000 doesn’t count and both plans hit the $72,000 cap. The Solo 401(k) keeps only its catch-up advantage.

When a SEP IRA still makes sense

• You want minimal admin. A SEP set up with Form 5305-SEP usually needs no annual information return. A Solo 401(k) must file Form 5500-EZ when plan assets exceed $250,000 at the end of the year (the IRS plan page says $250,000 or more, so file if you’re at the line), per the IRS.
• You’re late. It’s after your filing deadline, but you’ve extended your return. You can still set up and fund a SEP for that year, per Publication 560.
• You already max out a 401(k) at a day job. Your $24,500 deferral limit is per person, not per plan (see Can I Have a Solo 401(k) and a 401(k) at Work?). Once it’s used up, the Solo 401(k) and the SEP give you the same employer-side room, and the SEP is simpler. See also Can You Have a SEP IRA and a 401(k) at the Same Time?
• You have (or plan to hire) employees. A Solo 401(k) is only for an owner with no employees, or the owner and a spouse (Can My Spouse Contribute to My Solo 401(k)?).

When a Solo 401(k) is the better fit

• You want to save more than 20% of your net profit.
• You’re 50 or older and want catch-up contributions: $8,000, or $11,250 at ages 60–63, for 2026.
• You want a Roth option for the deferral portion, and your plan provider offers designated Roth contributions.
• You’re comfortable getting an EIN and, eventually, filing Form 5500-EZ.
• Your income comes in as commissions, so one closing can change the year. Solo 401(k) for Real Estate Agents works through that case with commission math.

Worked example: $80,000 of profit, at 45 and at 61

A single freelancer has $80,000 of Schedule C net profit in 2026, no employees and no 401(k) at another job. This is what each plan allows, step by step:

At 45, the Solo 401(k) lets this freelancer shelter $39,370, more than two and a half times the SEP’s $14,870. At 61, the catch-up brings it to $50,620. None of that is mandatory: the Solo 401(k) only sets a higher ceiling. If $14,870 is all you can spare, both plans take the same amount.

Deadlines in practice: the December 31 step

The side-by-side table gives the setup deadlines. What people miss is when you have to decide on the deferral. Publication 560 says that for an owner-employee, employee deferrals “must be elected by the end of the tax year.” The money itself can then go in by your tax filing deadline, including extensions.

So with a Solo 401(k) that already exists in 2026, sign your deferral election for 2026 by December 31, 2026, even if you won’t fund it until 2027. Without that election, what’s left for 2026 after year-end is the employer-style contribution, the same 20% a SEP would give you. The employer-style contribution doesn’t need an election in advance. Like a SEP contribution, it can be made up to your return’s due date, including extensions.

A brand-new plan has two deadlines. The employer contribution can go into a plan you adopt after year-end, as long as you adopt it by the return’s due date including extensions and elect to treat it as adopted on the last day of the prior year, under IRC 401(b)(2) as amended by section 201 of the SECURE Act (IRS). Employee deferrals are stricter: the IRS says retroactive deferrals are generally not permitted, and the exception in SECURE 2.0 section 317 lets a sole proprietor with no employees defer prior-year earnings into a new plan only up to the filing deadline without extensions. Not every provider offers retroactive adoption, so ask before you count on it. A SEP has no deferral to elect, which is why it’s the easier choice if you only think about retirement in March. The 2025 extended date, October 15, 2026, has passed. For what that means now and the 2026 dates, see the SEP IRA deadline guide.

To compare every option, including a SIMPLE IRA and a traditional or Roth IRA, see the guide to retirement plans for the self-employed.

Common mistakes

• Figuring 25% of net profit. On $80,000, that would be $20,000. The maximum employer-style contribution is $14,870, because the base is net profit minus half of SE tax and the 25% rate works out to 20% for you. SEP IRA for the Self-Employed explains why.
• Treating the $24,500 as per plan. It’s per person, across every 401(k) and 403(b) you defer into. Can I Have a Solo 401(k) and a 401(k) at Work? covers the split, including catch-up.
• Forgetting Form 5500-EZ. Once your one-participant plan assets pass $250,000, the annual return is due, and late filing penalties are high. See the dates and penalties in Do I Need an EIN to Open a Solo 401(k)?
• Keeping a Solo 401(k) after you hire. The IRS says the no-testing advantage “vanishes if the employer hires employees.” Eligible employees must be let into the plan, per the one-participant 401(k) page.
• Expecting the contribution to cut self-employment tax. For a sole proprietor it lowers income tax only; Does a Solo 401(k) Reduce Self-Employment Tax? shows the numbers.
• Funding both plans for the same business to double up. Contributions to both count toward one $72,000 limit. See the FAQ below.

For the full walkthrough of a SEP on its own, see SEP IRA for the Self-Employed in 2026. To plug in your own profit, use the calculator.