Solo 401(k) vs SEP IRA: Which Wins for the Self-Employed in 2026

Contribution math

SEP IRA gives you the employer share only, 25% of W-2 wages or about 20% of net SE earnings. Solo 401(k) gives you the same employer share plus a $23,500 employee deferral on top. At any income below about $350,000 of net SE earnings, the Solo 401(k) puts more money into retirement. After that, both plans hit the same $70,000 combined cap.

Roth option

Solo 401(k) allows Roth on the employee deferral (and Roth on the employer share since SECURE 2.0, though provider support is sparse in 2026). SEP IRA has no Roth option at all, every dollar is Traditional pre-tax.

Loans

Solo 401(k) lets you borrow up to $50,000 (or 50% of vested balance, whichever is less). SEP IRA does not allow loans. Period. If you suspect you might need cash access, this single difference often decides it.

Setup cost and paperwork

SEP IRA wins here: 5 minutes at any broker, no Form 5500 ever. Solo 401(k) takes about 30 minutes (you sign a plan adoption agreement) and requires Form 5500-EZ once plan assets exceed $250,000, but the form is one page and free.

If you ever hire

SEP IRA forces you to contribute the same percentage to every eligible employee. Solo 401(k) becomes ineligible the moment you hire a non-spouse W-2 employee for 1,000+ hours. Both have to be transitioned, but Solo 401(k)'s death is faster and cleaner.

The verdict

For 95% of one-person businesses Solo 401(k) wins because of the $23,500 deferral, Roth option, and loan provision. SEP IRA is the right pick when you want zero paperwork or expect to hire employees soon and don't want to bother setting up a 401(k) you'll have to migrate.

The $271k retirement gap

For someone earning $80k net SE income at age 35, the Solo 401(k) puts $23,500 more in retirement every year. Compounded at 7% real for 30 years, that's roughly $271,000 in extra retirement assets, purely from the employee deferral that SEP IRA can't match.