SEP-IRA or Solo 401(k) — which should I pick?

For most solo earners who want to maximize savings, the Solo 401(k) wins because the flat employee deferral lets you contribute more at a given income. Choose a SEP for simplicity, a later deadline, or if you have employees.

Do retirement contributions lower self-employment tax?

No. They reduce income tax only. Self-employment tax is based on your net profit and isn't affected by retirement contributions.

Retirement

SEP-IRA vs Solo 401(k): which is better for you?

Updated June 2026·2 min read·Checked against IRS Rev. Proc. 2025-32

Putting money into a self-employed retirement plan does double duty — it builds your future and cuts this year's income tax. The two main options, the SEP-IRA and the Solo 401(k), both shelter a big share of profit. Here's how they differ for 2026 and which usually wins.

Key takeaways

✓Both cap total contributions at $72,000 for 2026.
✓A Solo 401(k) lets you save more at lower incomes thanks to a $24,500 employee deferral.
✓Contributions cut income tax, not self-employment tax.

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How each one works

A SEP-IRA is employer-funded only: you contribute up to 25% of compensation (which works out to roughly 20% of net self-employment earnings). A Solo 401(k) has two parts — an employee deferral of up to $24,500 in 2026 plus an employer profit-sharing contribution of up to 25% — combined up to the $72,000 overall limit. Both are based on compensation capped at $360,000 for 2026. (Source: IRS Notice 2025-67.)

Which lets you save more

At lower and middle incomes the Solo 401(k) wins, because the $24,500 employee deferral stacks on top of the percentage-based employer piece — so you can shelter far more of a modest profit. At high incomes both plans converge on the same $72,000 ceiling. If maxing out tax-deferred savings is the goal, the Solo 401(k) almost always gets you there on less income.

The other differences

A Solo 401(k) can also take Roth contributions and allows loans; a SEP cannot. But a SEP is simpler to open and can be set up and funded as late as your tax-filing deadline (including extensions), while a Solo 401(k) generally must be established by December 31. If you ever hire employees, a SEP must cover them too, which changes the math.

The tax effect

Traditional contributions to either plan reduce your taxable income, lowering income tax in the year you contribute — but they don't reduce self-employment tax, which is still 15.3% on 92.35% of your profit. Enter a contribution in the calculator's Fine-tune step to see exactly how much income tax it saves.

Frequently asked questions

Up to $72,000 total to a SEP-IRA or Solo 401(k) (on compensation up to $360,000). A Solo 401(k) includes a $24,500 employee deferral within that cap; a SEP is up to 25% of compensation.

Self-employed tax deductions →How much to set aside →Self-employment tax calculator →

A planning estimate, not tax advice. Figures use IRS Rev. Proc. 2025-32 (2026). Confirm decisions with real money on the line with a CPA or enrolled agent.