SEP IRA vs solo 401(k): the paperwork-light plan vs the bigger-bucket plan

By Tom, CPA · Updated October 25, 2026

TL;DR: A SEP IRA is simpler and allows only employer contributions (about 20% of net self-employment earnings for sole proprietors, up to $72,000 in 2026). A solo 401(k) adds a $24,500 employee deferral, so it shelters more at most incomes below the cap, offers Roth options, and doesn't break a backdoor Roth.

Educational only, not tax, legal, or investment advice. Examples are illustrations, not predictions. Rules and limits change; verify current figures and talk to a qualified professional about your situation.

Self-employed people get two popular retirement plan options, and the internet argues about them with the intensity usually reserved for sports teams. The SEP IRA is the easygoing one: open an account, contribute, done. The solo 401(k) is the overachiever: more paperwork, more features, more room.

Neither is wrong. They just win in different situations. Here's how to tell which one fits, using actual 2026 numbers.

CPA Warning Label: A SEP IRA is an IRA. On December 31 it joins your pro-rata calculation, which can quietly turn a backdoor Roth into a taxable event.

Side-by-side comparison

How the SEP works

A SEP (simplified employee pension) is set up with a simple written agreement, often the IRS model Form 5305-SEP, and contributions go into SEP IRAs for each eligible employee. The IRS SEP page notes contributions can't exceed the lesser of 25% of compensation or the annual dollar limit ($72,000 for 2026), with compensation capped at $360,000. Only the employer contributes.

The big catch arrives when you hire. A SEP must generally cover employees who meet the eligibility rules (age 21, worked for you in at least 3 of the last 5 years, and earned at least $800 in 2026, if your plan uses the maximum permitted conditions), and you must contribute the same percentage for them as for yourself. That can be fine. It can also be expensive.

Illustration: contribution room at three incomes

Illustration (assumptions): sole proprietor, age 45, no other job or plan, 2026, standard SE tax computation, figures rounded. The employer piece is about 20% of net profit after the half-SE-tax deduction for both plans.

The $300,000 row is rough because profit that high crosses the Social Security wage base, which changes the SE tax calculation. The direction is what matters: at moderate incomes, the solo 401(k)'s employee deferral adds thousands of dollars of room. Only at very high incomes do the two plans converge on the $72,000 cap, and even then the solo plan allows catch-ups on top.

The backdoor Roth problem with SEPs

This is the sneaky one. A SEP IRA is a traditional IRA for pro-rata purposes. If you have a SEP IRA balance on December 31 and you did a backdoor Roth that year, part of your conversion becomes taxable. Our pro-rata guide works through the math.

Illustration: Lavish Larry contributes $7,500 nondeductible, converts it, and has $67,500 in a SEP IRA on December 31. Tax-free share: $7,500 ÷ $75,000 = 10%. So $6,750 of his "backdoor" is taxable. A solo 401(k) holding the same $67,500 wouldn't count at all.

When the SEP wins

• You want minimal admin. No Form 5500-EZ, no plan document restatements beyond the simple agreement.
• It's late in the game. A SEP can be established and funded up to the business's tax return due date, including extensions. That's useful if you realize in March that last year was profitable.
• You have employees and want a simple plan where everyone gets the same percentage.
• You don't do backdoor Roths and won't.

When the solo 401(k) wins

• Moderate self-employment income, where the employee deferral meaningfully increases the total.
• You're 50 or older and want catch-up contributions, especially in the $11,250 age 60–63 window (see super catch-up).
• You want Roth deferrals, loans, or possibly after-tax contributions.
• You do backdoor Roths or want a place to roll pre-tax IRA money.

Can you have both, or switch?

You can switch over time. Many people start with a SEP and move to a solo 401(k) as income grows. Having both in the same year with the same business is complicated by plan rules and combined limits, so most people pick one per year. If you switch, rolling the SEP IRA balance into the solo 401(k) (if the plan accepts roll-ins) removes it from your pro-rata calculation.

Illustration: Fran and Larry pick plans

Fran (assumptions): 52, freelance designer, $90,000 net profit, no employees, does a backdoor Roth every year. A SEP would allow about 20% of her profit after the half-SE-tax deduction, roughly $16,700. A solo 401(k) allows that plus a $24,500 deferral plus an $8,000 catch-up, for roughly $49,200. And the solo plan keeps her backdoor clean. Easy call: solo 401(k).

Larry (assumptions): 39, runs a small landscaping business with three year-round employees, $150,000 net profit. A solo 401(k) isn't available because he has eligible employees. A SEP would require contributing the same percentage of pay for each eligible employee as for himself. A SIMPLE IRA or a traditional 401(k) with a safe harbor design are alternatives worth pricing. His decision is really about the cost of covering staff, not about his own limit.

The lesson: the "best" plan depends less on the plan and more on the business around it.

Mistakes to avoid with either plan

• Computing the employer contribution from revenue instead of net profit.
• Forgetting that deferrals at a day job count against the solo 401(k) employee limit.
• Opening a SEP IRA in a year you already completed a backdoor Roth.
• Missing the Form 5500-EZ once the solo plan tops $250,000.
• Assuming you can set up a SEP without covering a part-time employee who meets the eligibility rules.

A quick decision path

1. Do you have, or plan to have, eligible employees other than a spouse? If yes, the solo 401(k) is off the table; look at a SEP or a regular 401(k).
2. Do you do, or want to do, backdoor Roth IRAs? If yes, lean solo 401(k).
3. Is your net profit under roughly $250,000? The solo 401(k) likely allows more.
4. Is it already past December 31 and you have no plan? A SEP may be the simplest catch-up, though new solo plans can also be adopted late for employer contributions; check provider rules.