The core difference
A SEP-IRA (Simplified Employee Pension) only allows an employer contribution — up to 25% of net self-employment compensation, capped at $70,000 in 2026. There is no employee deferral component.
A Solo 401(k) adds a $23,500 employee deferral (salary deferral) on top of the same 25% employer contribution. This makes it more powerful at any income level below about $175,000 — which is where the employer contribution alone hits $70,000 in a SEP-IRA.
Side-by-side comparison
| Feature | Solo 401(k) | SEP-IRA |
|---|---|---|
| 2026 max contribution | $70,000 | $70,000 |
| Employee deferral | $23,500 | None |
| Employer contribution | Up to 25% of net comp | Up to 25% of net comp |
| Roth option | Yes (at most providers) | No |
| Loan allowed | Yes | No |
| Complexity | Moderate | Simple |
| Best for income below $175k | ✅ Solo 401(k) | — |
| Best for income above $175k | Similar | SEP-IRA is simpler |
| Deadline to open | Dec 31 | Tax filing deadline |
Which is better at different income levels?
Under $60,000 net income: Solo 401(k) wins decisively. The $23,500 employee deferral alone may exceed the SEP-IRA limit. Example at $50,000 net income: SEP-IRA limit ≈ $9,293. Solo 401(k) limit ≈ $32,793.
$60,000–$175,000 net income: Solo 401(k) allows contributions $10,000–$23,500 higher per year. Compounded over 20 years at 7%, that difference exceeds $1 million.
Above $175,000 net income: Both plans hit the $70,000 cap via the employer contribution alone. SEP-IRA's simplicity (no plan documents, no 5500 filing above $250,000 in assets) becomes an advantage.
For Roth contributions: Solo 401(k) wins at any income level — SEP-IRA has no Roth option.
When SEP-IRA is the right choice
A SEP-IRA makes more sense when: - You earn above $175,000 and the Solo 401(k) employee deferral doesn't add meaningfully to your limit - You have W-2 employees (Solo 401(k) is restricted to solo operators) - You want the simplest possible setup with no plan document requirements - You missed the December 31 Solo 401(k) opening deadline (SEP-IRA can be opened up to your tax filing deadline, including extensions)
Can you have both?
You cannot have both a SEP-IRA and a Solo 401(k) for the same self-employment activity in the same year — the IRS limits you to one plan per business. However, if you have multiple businesses (e.g., LLC freelance work and an S-Corp consulting firm), you may be able to maintain separate plans — consult a tax advisor for your specific structure.
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Frequently Asked Questions
Is a Solo 401(k) or SEP-IRA better for a freelancer?
For most freelancers earning under $175,000 in net income, a Solo 401(k) allows significantly higher contributions because of the $23,500 employee deferral. At $80,000 net income, the Solo 401(k) limit is about $37,000 vs. a SEP-IRA limit of about $14,865 — a $22,000 advantage.
Can I switch from a SEP-IRA to a Solo 401(k)?
Yes. You can open a Solo 401(k) for the new tax year (by December 31) and stop contributing to your SEP-IRA. You can either keep your SEP-IRA balance invested or roll it over into the Solo 401(k) if your plan allows incoming rollovers (most do). Both accounts can coexist holding old balances.
Which has lower fees — Solo 401(k) or SEP-IRA?
Both are free to open and maintain at major providers (Fidelity, Schwab, Vanguard). The Solo 401(k) requires a plan document (provided free by the brokerage) and an IRS Form 5500-EZ filing once the plan exceeds $250,000 in assets. SEP-IRA has no such filing requirement. For most self-employed workers with under $250k in the plan, both are equally free.